Finance Cost Restriction
Until recently, landlords could offset all of their mortgage interest payments against their rental income, but from 6 April 2017, this relief is gradually being phased out. Although these changes have been around for a while now, we are starting to see the initial impact on our clients as we are start to prepare their 2017-18 tax return. As a result, we thought it would be worth jogging your memories about this one.
The amount of mortgage interest that you can set off against your income will gradually taper away and will be replaced by a basic rate tax relief. This will give you 20% tax credit meaning your final bill will be cut by 20% of your interest. If you are a basic rate taxpayer, the tax credit relief should mean that you don’t see any difference in the tax you pay. The impact will be felt by those who are in a higher rate tax bracket.
How will the relief work?
The level of relief you can claim in your tax return will be;
| Tax Year | % of mortgage interest deductible against income | % of mortgage interest eligible for 20% tax credit |
| Prior to 6 April 2017 | 100% | 0% |
| 2017-18 | 75% | 25% |
| 2018-19 | 50% | 50% |
| 2019-20 | 25% | 75% |
| 2020-onwards | 0% | 100% |
This will mean an increase in your taxable income as the amount you pay on interest is added back in, which, if you are close to the threshold, could push you into the higher rate tax bracket. It will also mean a higher tax bill for those landlords in the higher rate tax bracket as they will only get a tax credit at the basic rate level.
It’s important to note that these changes only affect landlords who hold their properties privately. These changes do not affect properties that are held within a limited company.
What can you do?
Incorporate –
It is possible to transfer your properties into a limited company structure in order to benefit from lower corporation tax rates as well as being able to claim 100% of the loan interest. The downside to this is that it would require remortgaging and there would be Stamp Duty Land Tax payable on the value of the property at the transfer date.
Increase Rent –
Unfortunately, it is a real possibility that many landlords will increase rent to cover the additional tax charge resulting from the changes.
Convert your Mortgage –
If you have an interest-only mortgage, you may want to consider switching to a repayment mortgage as this will start to reduce the amount of interest you have to pay in the first place.
Sell up –
It was thought that these new measures may make some landlords with smaller portfolios consider selling up altogether. Before you do, consider both your long-term goals and the current property market. Are your goals for steady rental income or capital gains as this may impact on your decision.
If you want to know more about the options you have, then please get in touch.