Clause 24 came into effect from the tax year which is just ending, so here is a reminder for residential landlords regarding it’s impact on their deductible expenses over the next few years.
Announced during the summer budget of 2015, Clause 24 was introduced to restrict deductions for finance costs (e.g. mortgage interest or loan interest) against property income received by individuals from residential property.
The restriction came into effect from 2017/18 (the tax year just ending), but steps up in 2018/19 and future years.
Only part of the finance cost will now be allowable as a deduction from income. The balance will be eligible for tax relief at the basic rate.
By 2020/21 no relief will be given as a deduction from income.
| Tax year | Finance costs allowable as a deduction |
|---|---|
| 2017/18 | 75% |
| 2018/19 | 50% |
| 2019/20 | 25% |
| 2020/21 | 0% |
We are currently heading into our second year of this phased regime, with 50% of finance costs being allowed as a deduction from income, as demonstrated below.
| 2015/16 | 2016/17 | 2017/18 | |
|---|---|---|---|
| £ | £ | £ | |
| Rent received | 18,000 | 18,000 | 18,000 |
| Finance costs paid | 10,000 | 10,000 | 10,000 |
| Rental income | 18,000 | 18,000 | 18,000 |
| Deductible | (10,000) | (7,500) | (5,000) |
| Rental profit | 8,000 | 10,500 | 13,000 |
| Basic rate taxpayer | |||
| Rental profit | 8,000 | 10,500 | 13,000 |
| Tax @ 20% | 1,600 | 2,100 | 2,600 |
| Relief for finance costs @ 20% | N/A | (500) | (1,000) |
| Total payable | 1,600 | 1,600 | 1,600 |
| Higher rate taxpayer | |||
| Rental profit | 8,000 | 10,500 | 13,000 |
| Tax @ 40% | 3,200 | 4,200 | 5,200 |
| Relief for finance costs @ 20% | N/A | (500) | (1,000) |
| Total payable | 3,200 | 3,700 | 4,200 |
The affect this has is much wider than just mortgages, as the term finance costs includes costs such as arrangement fees, associated legal fees and other loan interest.
If you would like more information on this, or you would like to discuss ways to reduce the impact that Clause 24 may have on you please contact Emma Robinson on emma.robinson@randall-payne.co.uk or call 01242 776000.
