HMRC is set to take another bite out of landlord income tax relief on finance costs with the start of the new financial year.

The 2019-20 tax year, which starts from April 6, marks the third stage of phasing income tax relief restrictions down to the basic rate of tax on the cost of finance interest.

All landlords paying finance costs are impacted, but those paying income tax at the higher rate or more (40%/45%) are hit the worst.

From April 6, landlords can claim 25% of their finance costs as a property business expense.

In 12 months, landlords claims for property business finance costs end as a business expense.

Instead every landlord will receive an allowance of 20% of their finance costs to set off against income tax regardless of the rate that they pay income tax – down from 40% or 45% for top rate taxpayers.

Finance costs for landlords include mortgage interest and interest on other loans, overdrafts or credit cards paid by their property business.

The finance cost restrictions started in April 2017 as part of a tax grab by then Chancellor of the Exchequer George Osborne.

Other tax moves included enhanced stamp duty and capital gains tax rates for landlords and a change in the way property profits were calculated.

The tax changes only affect finance costs for individual landlords – limited companies continue to set off finance costs against corporation tax.

Phasing in the finance cost restriction

Tax year Finance costs deductible from rental income Basic rate tax reduction
2017 to 2018 75% 25%
2018 to 2019 50% 50%
2019 to 2020 25% 75%
2020 to 2021 0% 100%

Source: HMRC

Read more about tax relief on finance costs and property profits