The amount of income tax relief some landlords get on residential property finance costs has been restricted to the basic rate (20%) from 6 April 2017.
If you are a basic rate tax payer, you won’t notice any difference in the amount of tax relief you receive, but there is a different way of claiming it.
HMRC are phasing the restriction in gradually from 6 April 2017 and it will be in place fully from 6 April 2020.
The phasing in will be as follows:
• 2017-18 - Claim 75% as normal, claim 25% as a tax adjustment at basic rate.
• 2018-19 - Claim 50% as normal, claim 50% as a tax adjustment at basic rate.
• 2019-20 - Claim 25% as normal, claim 75% as a tax adjustment at basic rate.
• 2020-21 - No claim as normal, claim 100% as a tax adjustment at basic rate.
So, for 2017-18, you will claim 75% of your loan interest as an allowable expense in the section for Property expenses - Loan interest and other financial costs (box 26 on the paper tax return). Then under the section Calculating your taxable profit or loss – Residential finance costs not included in box 26, you will show the other 25% of your loan interest (box 44 on the paper return). We will then automatically allow you 20% basic rate tax relief on that 25% figure.
If you are a higher rate tax payer, you will notice the difference. For 2017-18, you will still get higher rate tax relief on 75% of your finance costs, but you will only get basic rate tax relief on the remaining 25%.
Please see the links below for more guidance on this on GOV.UK.