Chancellor George Osborne sent shockwaves through the private residential sector in July when he announced his intention to restrict interest relief for individual landlords.

In this article, I am going to explore the impact of those restrictions, look at who it affects and by how much, and then explore a number of methods for avoiding that impact. The methods I will look at in this article do not involve using a company: that warrants another article in its own right!

The Restrictions
In future, residential landlords will be taxed on profits before interest and finance costs and then given tax relief for those costs at basic rate only. The change is being phased in over a four year period commencing in 2017/18. Borrowings relating to furnished holiday lettings or non-residential property are exempt from the new restrictions and are not affected. Companies are exempt from the new restrictions but many other business structures, such as partnerships, are caught.

For example, an investor with rental profits before interest of £100,000 and interest costs of £60,000 is currently taxed on net rental income of £40,000. This makes them a basic rate taxpayer and, in the absence of any other income, they would have an annual tax bill of less than £6,000.

By 2020/21 that investor will be taxed on rental profits of £100,000, making them a higher rate taxpayer. They still get tax relief for their interest costs: but only at basic rate; so they end up with an annual tax bill of around £15,500.