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Major changes to tax relief finance costs – what are your options?

Fri 21 Jul 2017

Richard Whitelock, Head of Private Clients at Garbutt & Elliott, Chartered Accountants, Tax & Wealth Management Advisors, comments; Property landlords have encountered several changes made by the Government in recent years. April 2016 saw both the 3% hike in Stamp Duty Land Tax and the abolition of the 10% Wear & Tear allowance.

From April 2017, mortgage interest (and other finance costs) are no longer fully deductible from rental profits for tax purposes. Instead, landlords receive a basic rate reduction from the income tax liability for their finance costs.

The restriction to tax relief on finance costs is being phased in over a four-year period, between April 2017 and April 2020. In the transitional years landlords will be able to claim:

% of Finance Costs:

2017/18

2018/19

2019/20

2020/21

Deductible from rental profits

75%

50%

25%

0%

Given as basic rate deduction

25%

50%

75%

100%



Who does it affect?

Whilst the changes generally hit landlords who are higher rate taxpayers, as the tax relief they receive on finance costs will be reduced from 40% to 20%, they can also affect basic rate taxpayers, depending on their income levels and how highly geared their property business is.

The changes affect individual landlords, but not companies. They also affect residential property, but not commercial or Furnished Holiday Lettings.

 

What can I do to mitigate the impact?

Below are some of the main options that landlords should be considering to reduce the impact of these changes:

  • Repay your borrowings – it may be possible to use your pension fund
  • Increase rent to account for the extra tax – but can your tenants bear this?
  • Transfer property share(s) to lower taxed spouse or family members
  • Sell property(ies) – but watch out for Capital Gains Tax
  • Transfer existing properties into, or buy future properties via, a limited company
  • Switch from shorthold tenancy lettings to qualifying holiday lettings
  • Refinance borrowings - if you have a combination of residential and commercial

 

For further information please contact Richard Whitelock, Head of Private Clients – [email protected]