Landlords tax relief reduced
At present, landlords are entitled to claim tax relief at their top level of tax on monthly interest repayments in relation to any loan taken out to buy, improve or maintain residential buy-to-let properties (for example mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans). However, as announced by George Osborne in his second budget of 2015 this relief is to be restricted to the basic rate of income tax – currently 20%.
To give landlords time to adjust – and perhaps an acknowledgement as to how drastic a change this is – it will be phased in from April 2017, becoming fully effective from April 2020, as follows:
|Year||% finance costs deduction||% basic rate tax reduction|
Of course, those who own buy-to-let property either free of debt or through a company (as the change only applies for income tax purposes) will not be affected by the proposed changes, but for all other landlords, it would be wise to use this measured rate of introduction to plan an approach so as to mitigate, as far as is possible, the hit to their earnings.
What do the changes mean in practice?
- Rental income (after deducting all expenses other than interest) = £40,000
- Interest payments = £30,000
- Personal allowance and basic rate band has been used by other income.
- Income tax on profit of £10,000 = £4,000
From 2020 onwards:
- Income tax on profit of £10,000 = £10,000, representing a tax rate increase of 100%.
What can be done to mitigate the effects?
As always, much will depend on the individual circumstances of the landlord who may simply choose to do nothing and accept that their investment has a much reduced or even negative running yield, instead relying upon capital growth for profit. Those who are in a position to do so may prefer to repay the loan perhaps by selling assets or possibly re-financing other assets. An alternative could be to invest jointly with others in a debt-free residential property.
While there may be some who wish to sever all ties by selling their rental property, many others will no doubt wish to continue investing in the property sector but not be open to the options above. For those individuals, turning their rental activities into a business could be the way forward. By transferring one or more properties into a company structure, various tax reliefs could be realised. Another option could be to sell the whole or part of their interest in the buy-to-let property to a company which they control, on the proviso that the company take on the whole of the borrowing.
However, there is no magic solution as each of these options has their own tax consequences and wider commercial issues to consider as well.
Whatever option is chosen, no doubt complex considerations will arise. We would be happy to apply these to your individual circumstances and discuss. Please do not hesitate to contact us if we can be of assistance in this regard.