Under current rules anyone who has taken out a loan such as mortgage to purchase a buy to let property can deduct all of the interest paid on the loan from rental income in order to reduce their income tax liability.
From April 2017 tax relief on property loans for residential property will be restricted for higher rate tax payers, increasing the amount of tax paid on rental income. The deduction of finance costs such as mortgage interest, are gradually being withdrawn and by 2020 will be replaced with a basic rate relief tax reduction alone.
Landlords will be able to obtain relief as follows:
- in 2017 to 2018 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
- in 2018 to 2019, 50% finance costs deduction and 50% given as a basic rate tax reduction
- in 2019 to 2020, 25% finance costs deduction and 75% given as a basic rate tax reduction
- from 2020 to 2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction