The measure, which was introduced in the summer Budget 2015, will restrict relief for finance costs on residential properties to the basic rate of income tax, with the restriction fully coming into place from April 2020.
These finance costs include mortgage interest, interest on loans to buy furnishings and fees that incur when taking out or paying back these mortgages and loans.
Buy-to-let landlords will be able to deduct 75% of finance costs from rental income in 2017/18 and use a 25% basic rate tax reduction. This becomes 50% finance costs deduction and 50% of basic rate tax reduction in 2018/19, then 25%/75% before reaching 0% deduction of finance costs and 100% basic rate tax reduction in 2020/21.
This restriction does not apply to companies or furnished holiday lettings.
There has been uproar about these measures with two buy-to-let landlords forming a fundraising exercise with campaign group ‘Axe the Tenant Tax’ to launch a judicial review of Clause 24 of the Finance Bill 2015.
However, on 6 October 2016 they were unsuccessful at the High Court but have vowed to continue to push the case to government.
Kersten Muller, partner of real estate at Grant Thornton, said: ‘The proposed restriction on the tax deductibility of interest for private buy-to-let investors is one area that should be reconsidered.
‘The rules are very complex and based on the notion that tax deductions for mortgage interest on investment properties are ‘unfair’. This does ignore the fact that the landlord takes the risk of property ownership, including repairs, vacancies and potential non-payment.