2017/18 marked the start of changes linked to the restriction for tax relief on finance costs. This year, on 6 April 2018 the next set of changes are happening. In the nutshell it’s all about finance costs and the associated tax relief.
So who do these tax relief changes affect?
The restrictions apply to all landlords of residential properties falling under the individual, partnerships or trust categories. Based in the UK with a buy to let property abroad? Then this applies to you. Are you a landlord living outside the UK who rent’s out property here? This will also be relevant for you.
And who won’t be affected?
It’s good news for companies, it doesn’t apply to you. Any furnished holiday let owners, development businesses or anyone dealing in land and property will also be exempt.
The full scope of the changes
The changes are more far reaching then many people imagine so don’t be caught unawares. Covering both interest and tax relief, all of the following will be affected:
- Mortgage interest on buy to let property
- Interest on loans for furnishings or general expenses
- Tax relief for the arrangement of loans and any other associated fees
- Any costs linked to alternative finance arrangements i.e. Sharia compliant lending
As of 6th April 2018 the percentage of interest that you can take off your property based income will change from 75% to 50%. This means that the amount of tax you will then pay at both the basic and higher rate will be less – but the overall amount of tax you will pay is likely to be higher. Sounds contradictory? It’s because the remaining 50% will only be eligible for basic rate tax relief and could push you into paying higher rate tax.
So how can the tax relief be worked out?
So to clarify only 50% of interest can be taken off your rental income. Of the remaining pot 20% can be claimed as a credit against your tax bill. But there are certain stipulations on this credit amount meaning that if the credit amount if more than (a) the tax on your rental income or (b) your savings income including dividends the credit would be capped at whichever is the smallest of these two amounts. Do remember that the excess can be carried forward and can be used in a later year if needed.
Useful tip for Scottish taxpayers: A reminder that from 6th April 2018 the higher rate threshold kicks in sooner as would the associated interest restrictions.
And the solution is…….
Unfortunately there are no easy answers but one option could be to change your rental properties to a company. The advantage of this would be that not only could you avoid finance cost restrictions but you could also shield at least some of your rental profits from income tax of up to 45%.
You would need to foot the bill for corporation tax but at the current rate of 19% this is much more pocket friendly. It’s important to remember that doing this could lead to other tax charges so do contact us if you would like some help and advice on this and we will be happy to help
Another way to help would be to reduce the interest you are paying out i.e. by accessing any savings to lessen the amount that is borrowed. The savings over time based on paying less interest will certainly be more than what the money would make in a savings account. If this isn’t an option for you an offset mortgage could be the answer.
See this as a good opportunity to refine and take stock of your business before these changes come into play as a small amount of forward planning now could help to lessen the financial impact of the above changes.
You might find this video from The Telegraph interesting: