From 6 April 2020, no finance costs will be allowed as a gross deduction but instead relief will be given at a flat 20% against the final tax liability.
Up until then, the new rules are being phased in so that the percentage of finance costs allowed as a deduction from gross property income falls each year.
For 2017/18 only 75% of finance costs were deductible, with a 20% flat rate tax reduction being given for the other 25%.
For 2018/19 these percentages are 50%:50% while for 2019/20 they will be 25%:75% so that in 2020/21 no finance charges will be deductible from profits. Instead a flat 20% tax deduction will apply to all finance charges.
Careful consideration needs to be given to these changes because, although the commercial return might not change, the profit for tax purposes increases. This can have a signification impact for landlords including
Individual landlords may therefore wish to consider restructuring their property businesses, for instance by a transfer to a company or sharing ownership.
The suitability of any planning critically depends on the landlord’s specific circumstances, priorities and objectives, and how the business is operated.
We would be delighted to advise on these matters as tax charges can apply where changes are made.
A further point to note in relation to taxation of property rents is that April 2016 saw the introduction of Replacement of Domestic Items Relief, which allows a deduction based on the actual costs of replacing furnishings (the cost to buy the original item being not allowable).
The relief is available to all residential landlords whether the property is furnished, partly furnished or unfurnished. Domestic items include moveable furniture, furnishings (including carpets), appliances, and kitchenware.
Some landlords may benefit from incurring expenditure prior to the end of the tax year to reduce profits and potentially limit the scope of the finance restriction rules
