In 2017/18, if a landlord incurs loan costs on a let dwelling, the allowable deduction is only 75% of the cost. The remaining 25% gets tax relief at 20% in the income tax calculation.
- This restriction does not apply to furnished holiday accommodation.
- This also does not apply in case landlord is a company.
- This applies only in case of residential property.
Example
Jack has employment income of £26,000 and rental income of £20,000. Costs are loan interest of £2,000 and other allowable expenses of £3,000.
| £ | ||
| Employment | 26,000 | |
| Property | £(20,000-(75% x 2,000) – 3,000 | 15,500 |
| Personal allowance | (11,500) | |
| Taxable Income | 30,000 | |
| Income Tax | £30,000 x 20% | 6,000 |
| Less tax reducer | £(2,000 x 25%x 20%) | (100) |
| Income tax liability | 5,900 |
Apologies, I lifted this straight out of ICAEW Vital magazine. I could not resist seeing such a simple and beautiful example.
Conclusion:
Basically, this change effects only tax payers whose total income goes over higher rate threshold (i.e. £46,351 for the tax year 2017-18) without deducting finance cost.
Example 1 : John has salary income of £30k and rental income of £15k and finance cost of £10k. John’s total income without deducting finance cost is £45k , this is below £46,351 thus no effect for John.
Example 2 : Jane has salary income of £30k and rental income of £25k and finance cost of £10k. John’s total income without deducting finance cost is £55k , this is above £46,351 thus this will effect Jane.
To learn how it will effect, see HMRC guidance.
Bonus fact:
- HMRC guidance mentions 82% of landlord will not be effected as their total income, without a deduction for finance costs, does not exceed the higher rate threshold.
- In tax year 2016-17, out of UK adult population of 53.2 million , c 30.2 million were tax payers (57% of adult population). Around 4.4 million (8%) were paying tax at 40% and 333k (0.6%) tax payers are in 45% tax bracket. Click here for Source.
- As per BBC article date June 2017. There are 15k individuals with incomes over £1m and 4k over £2m.
