Changes to Tax Relief for Residential Landlords; What to do now?

Until April this year landlords could offset their mortgage costs against their profits by claiming tax relief on their mortgage interest.  From April this year the tax relief that residential landlords receive has changed; over the next four years finance costs will be restricted to the basic rate of income tax.

Who will be affected?

  • UK residents that let residential property in the UK and overseas.
  • Non-UK residents that let property in the UK.
  • Individuals that let property in partnerships.
  • Trustees or beneficiary of trusts liable for income tax on the properties profits.

What finance cost restrictions will be included?

  • Loans (including loans to buy furnishings)
  • Overdrafts
  • Mortgages
  • Alternative finance returns
  • Fees and any other costs associated with receiving or paying off mortgages and loans.
  • Discounts, premiums and disguised interest

Simplified Example:

A landlord collects a rental income of £10,000 per year and pays a mortgage interest of £9,000 making a profit of £1000. Under the old tax method:

Basic rate (20%) would pay £200 tax.

Higher rate (40%) would pay £400 tax. 

In the future our landlord will have to pay tax on the whole amount:

Basic Rate £2000

Higher rate £4000

This increases the tax bill for the basic rate tax payers by £1,800.

This year in 2017-2018 you can deduct 75% of finance costs from your rental income and 25% will need to be at the basic rate of tax. During 2018-2019 this will change to 50% and by 2019-2020 landlords will be paying 75% at basic rate. By year 2020-2121 100% will be paid at basic rate tax.

So, what should you do now?

Here are some mitigating strategies from our CEO, Yasar Khan:

  • If you are a higher rate tax payer, consider assigning a larger proportion of the property to a spouse who is a basic rate tax payer
  • Under certain circumstances, establishing a limited company to manage your properties may be a practical and tax efficient structure
  • In some cases, it may be beneficial to hold the property in a limited company.  You will receive full tax relief for finance costs, although there are other considerations which work against this strategy

The key thing when there are fundamental tax changes such as this, is to review whether your existing arrangements continue to meet your objectives, and whether other strategies may be more effective.

You can contact us anytime for assistance, we are happy to help.