BUY TO LET RESIDENTIAL PROPERTY – CHANGES TO INTEREST RELIEF
25th January 2017
The Chancellor announced in the July 2015 Budget that higher rate tax relief on mortgage interest payments by individual buy-to-let landlords of residential property (and partnerships of individuals that are landlords) would be gradually withdrawn. Instead of treating the interest as a deduction in calculating net taxable property income, a landlord will claim basic rate relief as a reduction of his tax liability.
The restriction will not apply to the interest relating to properties that qualify as furnished holiday lettings.
Effect of changes
For 2016/17 and earlier tax years, 100% of the mortgage interest paid is allowed as a deduction from property income.
However, from 6 April 2017 onwards the amount of interest paid that will be allowed as a deduction in calculating profits will reduce as follows:
- for 2017/18, 75% of the interest will be allowable;
- for 2018/19, 50% of the interest will be allowable;
- for 2019/20, 25% of the interest will be allowable;
- for 2020/21 and subsequent years, 0% of the interest will be allowable.
For each of these years, and for subsequent years, the % of the interest not allowed as a deduction in calculating profits will be given as a basic rate reduction from the tax due on the rental income.
When considering the likely return on an investment, a landlord who is a higher rate taxpayer must factor in the unrelieved mortgage interest as an additional cost
An example of the impact of the changes for a higher rate taxpayer is shown below.
As a result of these changes it may be more attractive to own residential investment properties through a company.
The advantages of operating through a company include:
- relief is available for all interest paid;
- corporation tax at 20% is payable on income and gains;
- income can be accumulated in the company for distribution at a time when the shareholders are basic rate taxpayers;
- the first £5,000 of dividend income for each shareholder is taxable at 0%.
However, there can be significant costs involved in incorporating an existing residential property business – such as capital gains tax, stamp duty land tax/land and buildings transaction tax, and bank/finance costs to move the debt across to a new company.
Example of impact of changes for a higher rate taxpayer
John has borrowed £250,000 at a rate of 4%.
The information contained in this newsletter is for general guidance only and represents our understanding of relevant law and practice as at January 2017. Wright, Johnston & Mackenzie LLP cannot be held responsible for any action taken or not taken in reliance upon the contents. Specific advice should be taken on any individual matter. Transmissions to or from our email system and calls to or from our offices may be monitored and/or recorded for regulatory purposes. Authorised and regulated by the Financial Conduct Authority. Registered office: 302 St Vincent Street, Glasgow, G2 5RZ. A limited liability partnership registered in Scotland, number SO 300336.