By Tim Woodgates
IN the Budget 2016, the government announced changes to the level of tax relief that can be obtained from mortgage interest costs in relation to residential property lettings.
Currently, landlords can claim tax relief on their monthly mortgage interest repayments on buy-to-let residential properties at the top level of tax they pay (e.g. 40 or 45 per cent for higher rate tax payers). From 1 April 2017, this will be restricted to basic rate relief of 20 per cent.
Landlords who pay basic rate tax will see no change, but for those on higher incomes it will mean a significant change in tax status.
The changes will be phased in over a four-year period from 2017/18, with the restriction initially applying to 25 per cent of the finance costs incurred with the full restriction in effect from 2020/21. The new rules apply to individuals, partnerships and trusts. Companies and furnished holiday letting businesses are not affected.
For higher rate tax payers who let out residential property the impact could be more far-reaching than may first appear. For many, the reported income from the property portfolio will increase, meaning an increased tax liability. Other areas of concern include:
– Overall taxable income pushed into higher tax bands (40 per cent and 45 per cent)
– Potential loss of child benefit due to higher reported income
– Loss of personal allowance where reported income now exceeds £100,000
There are, however, planning opportunities that can be taken advantage of to mitigate against these effects. One obvious option is the incorporation of a property business. However there are many factors to be considered before going down this route. Besides the tax issues that arise (including Capital Gains Tax and Stamp Duty Land Tax), there are commercial issues too as well as consideration of succession and inheritance planning.
At Moore Stephens, we have already advised numerous clients on the best course of action to protect themselves against these changes, with the advice given specifically tailored to their individual goals and needs.
We would strongly encourage anyone affected by the changes to get in touch to discuss what can be done to ensure they are in the best position to maximise the return on their property investments and plan successfully for their future.
Tim Woodgates is a Tax Adviser at Moore Stephens Accountants in Corby, call 01536 461900 or visit www.moorestephens.co.uk/eastmidlands