HMRC has at last filled in the gaps on how mortgage finance relief will apply to buy to let landlords from April 2017.
The new rules change the way property rental profits are calculated by taking away tax relief on mortgage and other finance interest for landlords paying higher rate income tax at 40% or more.
Instead, a flat rate tax relief of 20% for mortgage and finance interest will be introduced for all landlords from April 6, 2017 that will be phased in over four years.
The measure affects buy to let landlords paying tax in Britain but renting homes in the UK or overseas and expat or foreign landlords letting homes in the UK from abroad.
Property companies, commercial landlords and holiday let businesses are unaffected.
Besides mortgage interest, finance interest on loans, overdrafts and some other linked charges are also impacted.
Landlords who have mixed commercial and residential portfolios will have to work out a fair and reasonable way to split the loan interest between the different categories of property.
“Finance costs won’t be taken into account to work out taxable property profits. Instead, once the income tax on property profits and any other income sources has been assessed, any income tax liability will be reduced by a basic rate tax reduction. For most landlords, this’ll be the basic rate value of the finance costs,” says the new HM Revenue and Customs (HMRC) guidance.
HMRC also explained that only some landlords will pay more tax, but if a landlord or their partner claims child benefit and income is over £50,000, high income child benefit charges will apply.
The new rules were announced by former Chancellor George Osborne in his 2015 Summer Budget.
He described them as levelling up tax breaks between property investors and first time buyers.
At the same time, he scrapped the 10% wear and tear allowance for landlords renting out furnished property and slapped a 3% stamp duty differential on buying homes for investment.