Landlord tax: an overview of the changes to buy-to-let tax relief

From 6 April 2017, the government made changes to the way landlords are taxed in the UK. These landlord tax changes will be phased in over the next four years and will not be applied at the full rate straight away – allowing landlords to take necessary action over time.

Who will the changes affect?

These changes will only affect landlords in the list below who have a mortgage for their rental property.

* Any UK resident individual who lets a residential property in the UK or overseas

* Any non-UK resident individual that lets a residential property in the UK

* An individual who lets residential property in partnership with others

* Trustees of a trust directly holding UK residential property

NOTE: These tax changes will not apply to landlords of furnished holiday lets and commercial properties.

What do the landlord tax changes mean for me?

Restricted tax relief on mortgage interest payments

The main change being made under the new tax rules, is that landlords will no longer be able to fully claim tax relief on their mortgage interest payments – so this change will only affect landlords who have a mortgage and not those who own their property outright.

However, the majority of buy-to-let landlords have an interest-only mortgage.

Currently, landlords can deduct allowable expenses and mortgage interest payments from their rental income and pay tax on the difference.

But from April 2017, landlords will only be able to claim tax relief at the basic rate of 20% on whichever figure is lower:

* Finance costs – including mortgage interest payments, loan repayments, overdrafts

* Profit from your rental income – calculated as rental income less allowable expenses

* Total income – calculated as anything other than savings and dividend income above the personal allowance after deducting losses and tax relief

NOTE: In most circumstances, the finance costs will be the lowest figure. But it’s important to highlight that it’s not just mortgage interest payments that will be used to calculate tax relief, but the lesser of the three figures above.

See below as to how the landlord tax changes:

The tax relief that landlords of residential properties get for finance costs is being restricted to the basic rate of Income Tax. This is being phased in from 6 April 2017 and will be fully in place from 6 April 2020.

How the tax reduction is worked out;

The reduction is the basic rate value (currently 20%) of the lower of:

* finance costs – costs not deducted from rental income in the tax year (this will be a proportion of finance costs for the transitional years) plus any finance costs brought forward

* property business profits – the profits of the property business in the tax year (after using any brought forward losses)

* adjusted total income – the income (after losses and reliefs, and excluding savings and dividends income) that exceeds your personal allowance

The tax reduction is not able to be used to create a tax refund.

If the basic rate tax reduction is calculated using the ‘property business profits’ or ‘adjusted total income’ then the difference between that figure and ‘finance costs’ is carried forward to calculate the basic rate tax reduction in the following years.

You are still able to deduct some of your finance costs when you work out your taxable property profits during the transitional period. These deductions will be gradually withdrawn and replaced with a basic rate relief tax reduction:

Tax Year Percentage of finance costs deductible from rental income Percentage of basic tax rate reduction
2017/2018 75% 25%










Restricting Finance Cost for Individuals

The changes will restrict relief for finance costs on residential properties to the basic rate of Income Tax. These changes will be introduced gradually from 6 April 2017.

Finance costs includes mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan.

Individuals will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs.

Individuals will be able to obtain relief as follows:

  • in 2017 to 2018 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
  • in 2018 to 2019, 50% finance costs deduction and 50% given as a basic rate tax reduction
  • in 2019 to 2020, 25% finance costs deduction and 75% given as a basic rate tax reduction
  • from 2020 to 2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction

Please contact us at GM Tax should you wish to discuss how this changes may impact on you.

Capital gains tax changes for foreign residents

21 July 2017 | Exposure Draft

As part of the 2017-18 Budget, the Government announced that it would be making capital gains tax (CGT) changes for foreign residents.

Main residence exemption

From 9 May 2017 the Government will remove the entitlement to the CGT main residence exemption for foreign residents that have dwellings that qualify as their main residence. Therefore any such capital gain or loss arising upon disposal of a foreign resident’s main residence will need to be recognised.

Principal asset test

From 9 May 2017 the Government will modify the foreign resident CGT regime to clarify that, for the purpose of determining whether an entity’s underlying value is principally derived from taxable Australian real property, the principal asset test will apply on an associate inclusive basis.

We urge you to seek professional advice when deciding to sell your property as a non resident.

Witholding tax on disposals made by non residents

New rules for foreign resident capital gains withholding (FRCGW) apply to vendors disposing of certain taxable property under contracts entered into from 1 July 2017.   The changes will apply to real property disposals where the contract price is $750,000 and above (previously $2 million) and the FRCGW withholding tax rate will be 12.5% (previously 10%) unless a clearance certificate is obtained from the ATO.  The existing threshold and rate will apply for any contracts that are entered into from 1 July 2016 and before 1 July 2017, even if they are not due to settle until after 1 July 2017.
Where a withholding obligation exists, the purchaser must withhold the relevant amount at settlement and pay it to the ATO without delay as a general interest charge may apply to late payments.   The purchaser is required to complete an online Purchaser Payment Notification form at which time the purchaser will receive a payment reference number, and a payment slip allowing payment to be made. 
The penalty for failing to withhold is equal to the amount that was required to be withheld. An administrative penalty may also be imposed.

Leaving Australia to work overseas – Watch your tax residency

An increasing number of Australians are deciding to become an expat, spending time living and working overseas – often in a low tax or no tax location.

However, if you don’t cease to be a tax resident of Australia you are likely to find yourself with an unwanted and avoidable tax bill.

Here’s why.

  • Individuals who are tax residents of Australia are usually taxable in Australia on their worldwide income – whether or not they bring the income back to Australia.
  • By contrast, a person who is not tax resident in Australia is only subject to Australian income tax on income that has an Australian source – usually only rental income from property located in Australia. Note: Bank interest, dividend income, and royalty income is usually not subject to additional tax when received by non-Australian residents, so long as the correct amount of withholding tax has been applied.

This means that if you remain a tax resident of Australia and receive income from an employment in a no tax/low tax jurisdiction you can expect to receive an unwelcome – and possibly avoidable – tax bill from the Australian Taxation Office.

A full understanding of what you need to do to become non resident for Australian tax purposes is therefore key to ensuring you keep as much of your expat salary as possible.

Issues to be considered here are your domicile status for tax purposes, whether you have established a “permanent place of abode” outside Australia, and provisions of any applicable Tax Treaty between Australia and the country in which you will be living and working.

GM Expat Tax advises many individuals who are departing Australia to live and work overseas, with particular reference to their residency status.

Taking such advice at an early stage is good planning – you can’t plan after the event!

Complete the enquiry form on this page if you are an Australian who is planning to spend a period of time living and working overseas, or if you are already working outside Australia as an expat.

We’ll be pleased to have an initial discussion with you about your situation, and how we might help.

Company Residence – Central Management and Control – Australian Tax Office Issues New Ruling

A limited company that is not incorporated in Australia is a tax resident of Australia under the central management and control test of residency if it:

  • Carries on business in Australia; and
  • Has its central management and control in Australia.

If a company has its central management and control in Australia, and it carries on business in Australia, it will carry on business in Australia within the meaning of the central management and control test of residency.

As per the ATO’s new Ruling: “It is not necessary for any part of the actual trading or investment operations from which its profits are made to take place in Australia.

This is because the central management and control of a business is factually part of carrying on that business.

It follows that a company carrying on business does so both where its trading and investment activities take place, and where the central management and control of those activities occurs.”

Becoming a tax resident of Australia can have significant consequences for a company, particularly if income or capital gains are to be derived from outside Australia.

Tax Treaty considerations are also likely to be a factor resulting if a company is a resident of Australia under the central management and control provisions, as many companies that become a tax resident of Australia as a result of these tests will then become dual residents: the company is also likely to be a tax resident of the country in which it was incorporated.

All in all, this is not a subject for the faint hearted!

Contact GM Expat Tax if you have concerns in this area.

UK Dividend Taxation: 2017 Budget Hike

The owners of small businesses in the UK are to bear the brunt of the efforts made in the 2017 Budget to reduce the UK’s deficit.

Following the introduction of a dividend allowance of £5,000 by his predecessor – with a tax charge on dividends that exceed this amount of at least 7.5% of the excess – Chancellor Hammond has reduced the allowance to £2,000 from the start of the 2018/19 tax year.

Many commentators are noting that this action is likely to affect those receiving dividend income by increasing their income tax bill by £225, this being the reduction of £3,000 x 7.5% (the rate of income tax payable by those whose total income does not cause them to be higher rate tax payers).

However, we would like to look back a couple of years, before the dividend allowance was introduced.

A typical scenario of the time might have seen a director/share holder receiving a dividend of (say) £20,000.

With a salary of £10,000 there would have been no additional tax to pay, as the total income was insufficient to generate a higher rate tax liability – ie there was no additional tax payable.

Assuming that same taxpayer now has a salary equal to the personal income tax allowance, the tax payable on the dividend income from 2018/19 will be £18,000 (ie £20,000, less the dividend allowance of £2,000) x 7.5%, or £1,350.

Alternatively, with a salary equal to the personal allowance, and income of £32,000 received by way of a dividend:

  • The first £2k will be free of tax
  • The next £30k will be taxable at 7.5%, giving tax payable of £2,250.

It should also be remembered that the company paying the dividend has already paid corporation tax before the dividend is declared – no longer do we have an imputation system in the UK whereby the dividend is accompanied by a franking credit representing the tax already paid by the company.

Remuneration strategies for those running a business through a limited company should be kept under review – contact GM Expat Tax to discuss your options, particularly if a departure from the UK is under consideration.

Changes to UK’s Deemed Domicile Provisions

From the start of the new UK tax year – ie from the 6th of April, 2017 – significant changes affect non-UK domiciled individuals, with the introduction of new deemed UK domicile rules for individuals who have been UK resident for more than 15 of the previous 20 years.

Part tax years and split tax years will be treated as years of residence for this test.

The existing deemed UK domicile rules apply to individuals who have been resident in the UK for 17 of the previous 20 years and attach only to inheritance tax ; the new rules will be extended to include income tax and capital gains tax.

Any who are covered by the new deemed UK domicile rules will have to report their worldwide income and gains to HM Revenue in the UK on an arising basis.

A new concept of a returning UK domiciliary is also being introduced.

Individuals who were born in the UK and who had a UK domicile of origin will be classified as a returning UK domiciliary under the proposed rules.

Non-UK-domiciled individuals who will have been UK resident for more than 15 of the previous 20 years on the 6th of April, 2017 should consider their position as soon as possible.

Ditto for those who had a domicile of origin in the UK, who have acquired a non-UK domicile of choice after spending a number of years away from the UK, and who will be resuming tax residence in the UK on or after the 6th of April, 2017.

We invite any who are concerned about their UK tax position to complete the enquiry form on this page for a free initial discussion.

UK IHT Residence Nil Rate Band Starts Next Month

The UK’s Inheritance Tax Residence Nil Rate Band (RNRB) comes into being at the start of the new UK tax year – ie on the 6th of April, 2017.

The RNRB is an amount of a deceased’s estate that is free of IHT, and is in addition to the standard nil rate band of (currently) £325,000.

An estate will be entitled to the RNRB if:

  • an individual dies on or after the 6th of April, 2017
  • the individual owns a home, or a share of one, so that it’s included in their estate
  • the individual’s direct descendants – such as children or grandchildren – inherit the home, or a share of it
  • the value of the deceased’s estate is not more than £2 million

An estate will also be entitled to the RNRB when an individual has downsized to a less valuable home, or has sold or given away their home after the 7th of July, 2015.

The maximum available amount of the RNRB will increase each tax year.

For a death in the following tax years the RNRB will be:

  • £100,000 in 2017/18
  • £125,000 in 2018/19
  • £150,000 in 2019/20
  • £175,000 in 2020/21

In  later years the maximum RNRB will increase in line with inflation.

Any unused RNRB when someone dies can be transferred to the deceased’s spouse or civil partner’s estate.

This can also be done if the first of the couple died before the 6th of April, 2017, even though the RNRB wasn’t available at that time.

For estates valued at more than £2 million, the RNRB (and any transferred RNRB) will be reduced by £1 for every £2 that the value of the estate is more than the £2 million threshold.

If you are concerned about UK Inheritance Tax and whether your estate continues to affected – even if you are now living overseas as an expat – we invite you to complete the enquiry form on the right of this page.