Interest Limitation Rules

The current coalition government has instituted several changes to the interest limitation rules on residential rental properties that will increase a landlord’s ability to deduct interest expenses from their taxable income. Below, we give you a brief background on the rules’ origins, we then discuss key aspects of the rules’ changes by the current government, and we conclude by talking to the application of the rules for the 2023/24 income year.

Interest Limitation Rules (Before the Change)
In March 2021, the former Labour government introduced rules to limit how much landlords can deduct interest expenses from their taxes for residential rental properties. The goal was to make the housing market less attractive to investors and help cool down high property prices. These rules sort to gradually reduce the tax deduction for interest on loans for properties (i.e. bought before 27 March 2021) from 25% from 1 October 2021 to 0% from 1 April 2025. Additionally, under the rules, landlords who bought properties on or after 27 March 2021 could not deduct interest expenses at all from the start.

Changes to the Rules
Under the current coalition government, the rules have been changed to increase the tax deductibility of interest expense from 1 April 2024. These changes will allow interest for loans on ALL residential rental properties to be claimed at 80% for the year beginning 1 April 2024, and 100% from 1 April 2025 onwards- so long as the loans drawn relate to the landlord’s rental activity.

2023/24 Income Year Rules Application
Unfortunately, for the year beginning 1 April 2023, the original rules still apply. Therefore, unless your rental property is a “new build”:

·         50% of interest can be claimed if it was bought before 27 March 2021; or

·         No interest can be claimed if it was bought on or after 27 March 2021.

 In summary, while the original rules may still restrict a landlord’s ability to claim interest in the 2023/24 income year, the changes introduced by the current government (effective from 1 April 2024) will allow for a significant increase in the deductibility of interest expenses for all residential rental properties- ultimately reaching 100% by 1 April 2025.