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The Chancellor confirmed in the Autumn 2015 budget that with effect from 6 April 2017, tax relief on interest relating to ordinary residential property businesses will be restricted so that, by 2020/21, such interest will only be given as a 20% income tax reduction.

Those individuals who own furnished holiday lettings and/or rented commercial property are unaffected by these new rules.

The change will be phased in as follows:

2016-17 2017-18 2018-19 2019-20 2020-21
% of interest allowed
as a deduction
100% 75% 50% 25% 0%
% of interest given
as a relief at 20%
0% 25% 50% 75% 100%
Effective interest
100% 80% 60% 40% 20%

It is important that landlords understand the potential effects that this change may have on both their taxable income and cashflow, as those with substantial interest outgoings could see the effective rate of tax on rental profit increasing significantly.

In many cases it is possible that this rule change will create a cashflow deficit for landlords as outgoings and tax costs could now exceed rental income, where previously they won’t have.

This is especially the case where property portfolios are highly leveraged.

We are assisting clients by calculating the impact of these changes and identifying potential solutions.

If you would like advice in this area, please contact us.

All views and opinions expressed in the blogs are personal to the writer and may not necessarily be shared by everyone at TAP but our clients are always welcome to put forward alternative views and questions which we will endeavour to share via future blogs, where appropriate.