Change in Buy To Let Interest Rules Factsheet

September 2015

The way in which buy to let landlords receive tax allowance for their loan interest payments is changing on 6th April 2017.

From this date all rental profits must be computed without including interest payments.

Relief on the interest payments will then be allowed at the basic rate of tax (currently 20%) via a tax credit.

The change will mean that 40% tax payers will see their tax relief on interest payments restricted to only 20%.

The changes will be phased in over three years starting from 6th April 2017 as follows:

    2017/18    -    25% of relevant interest disallowed
    2018/19    -    50% of relevant interest disallowed
    2019/20    -    75% of relevant interest disallowed
    2020/21    -    100% of relevant interest disallowed

Please note that Companies are not affected by the new rules.

The restriction applies to the costs of a "dwelling-related loan". This means any amount borrowed for the
purpose of a property business carried on to generate income from dwelling houses.

It does not apply to a business of dealing in property or developing property for sale, only to property letting

How do the changes work?

Let’s use an example:

Mrs X has a portfolio of residential properties. They generate income, net of expenses but before interest costs, of £100,000 a year. She pays loan interest of £70,000 a year.

Using the current rules, for 2015/16 she has rental income of £30,000. After personal allowances of £10,600, she will pay tax of £3,880 (all at the basic rate).

If the new rules had applied in full for 2015/16 she would have had a tax liability of £29,403 on income of £100,000 and then obtained a tax reduction of £14,000 (ie £70,000 x 20%), so would have paid tax of £15,403.

In this example the additional tax payable is therefore £11,523. Not pleasant!

Additional tax liabilities may also arise if the total income exceeds £100,000 as this will result in a loss of personal allowances.

The tax reduction is limited to tax at the basic rate on the profits of the property business in question, after deduction of any brought-forward property losses.

The computation becomes more complicated when the tax reduction cannot be fully used in the year, in particular when losses have been made.

Contact us and we will be pleased to provide further information on this.

Start planning now for April 2017

These changes are likely to have a significant effect on the tax payable for many buy to let landlords resulting in additional tax to pay for many.

Taxpayers should therefore start planning now for the April 2017 changes and we will be pleased to provide tax projections and any other assistance as required.