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Tax relief restrictions for UK residential landlords begin

Landlords who pay UK taxes on income from the rental of property (in the UK or overseas), will see a change to the calculation of the tax payable on that income starting this April. Read on to be prepared…

In 2015, the then UK Chancellor of the Exchequer, George Osborn, introduced a change to the tax relief available to landlords of residential property. The changes are wide ranging, with the reduction in relief of mortgage interest and finance costs being gradually phased in from April 2017 and over the following four years, so that relief will be based on total income and entirely restricted to the basic rate income tax – currently at 20 percent – by April 2021.

Until this April, landlords were able to claim tax relief on mortgage interest and finance costs, offsetting those against the rental income. From April 2017, there will be a restriction on several categories of finance costs. According to Gov.uk these include: mortgages, loans (including those made to buy furnishings), overdrafts, alternative finance returns, fees associated with mortgages and discounts, premiums and disguised interest.
Expats will be affected

The UK government’s official rental income web page at Gov.uk confirms that the change will the following categories of owners of residential property:

  • UK resident individual that lets residential properties in the UK or overseas
  • non-UK resident individual that lets residential properties in the UK
  • individual who let such properties in partnership
  • trustee or beneficiary of trusts liable for Income Tax on the property profits

According to the Residential Landlords Association (RLA), “You will not be affected if you operate a furnished holiday let, or a commercial lettings business. It will also not affect those with property in a limited company, but will affect LLPs and partnerships.” View their summary of tax changes affecting UK residential landlords.

Changes to tax relief for UK residential landlords

However, though your tax calculation may change, the government says that 82 percent of landlords will not have to pay more tax. You can see their reasoning (based on total income not exceeding the higher rate income tax threshold) and clear calculations of the effects of the changes on four different case studies.

The RLA warns that many residential landlords may be tempted to set up limited companies to mitigate the increase in tax (if there is one), but that may not be beneficial and may trigger a more complicated tax situation. They recommend seeking professional advice.

If you suspect you may not have understood tax rules regarding rental property and that you might owe some tax, all is not lost. The UK government has extended a type of amnesty with their Let Property Campaign in which you can tell HM Revenue and Customs (HMRC – the tax office) about income that hasn’t been declared by sending them a voluntary disclosure. Once you tell HMRC, they then give you 90 days to pay the previously undisclosed tax.

Find out more about renting and letting property in the UK.

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A great place to start looking for overseas property to buy or rent is Angloinfo Property,  where you can search by town or region, the number of beds, type of property, price and must-have features.

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