What is the ‘restriction of interest relief’?

If you are a residential property lettings landlord, the amount of interest relief you can claim on financial costs will gradually reduce between 6 April 2017 and 5 April 2020.

You will be affected by this change unless you are:

  • letting a residential property that meets all the criteria for a furnished holiday let; or
  • are running a property business through a company, including a non-resident company subject to income tax.

Your finance costs include mortgage interest, interest on loans to buy furnishings, and fees incurred when you take out or repay mortgages or loans. No relief is available for capital repayments of a mortgage or loan.

If affected, the proportion of finance costs you can offset against rental income from your residential buy to let properties will gradually reduce from April 2017. By tax year 2020/21, you will only be able to claim a tax deduction for these costs at the basic rate of income tax in your annual tax computation.

From 6 April 2017 to 5 April 2020, a restriction will apply as follows:

  • 2017/18 – 75% interest full deduction: 25% interest relieved at basic rate of income tax;
  • 2018/19 – 50% interest full deduction: 50% interest relieved at basic rate of income tax;
  • 2019/20 – 25% interest full deduction: 75% interest relieved at basic rate of income tax;
  • 2020/21 – 100% interest relieved at basic rate of income tax.

These rules apply to ‘costs’ of a dwelling-related loan, so they extend to other deductions including the incidental costs of obtaining loan finance.  A loan taken out to acquire a motor vehicle used in the management of a property business will also have a restriction on the allowable interest.

Tax planning advice from WMT’s specialists can help reduce the impact of the loss of relief and protect your cashflow.

Do you still have questions? Get in touch with our private client tax team to find out more about how they can help you.

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