How The Interest Relief Restriction Affects Landlords

mortgage interest relief restriction

As a result of high housing demand and record low mortgage rates the buy to let market is booming. It’s an attractive investment option for many because not only do you get a return from the rental income but due to house price increases you can also see capital appreciation.

Currently if you have a mortgage on an investment property you are permitted to deduct 100% of the mortgage interest cost from your property income to arrive at the taxable property profits figure.

What’s changing?

Under the new restriction the interest for finance costs will be restricted to the basic rate of income tax at 20%. This measure is being gradually phased in from 6th April 2017.

If you own investment property and are a basic rate tax payer then this will not have an impact on the amount of relief you will claim. If you own a furnished holiday letting this is excluded from this change.

However if you are a higher rate or additional rate tax payer you will be affected. Instead of deducting all the finance cost to arrive at the property profit it will be capped at the basic rate of tax which means the tax you will have to pay over to HMRC will increase.

What counts as finance costs?

HMRC define finance costs as mortgage interest, interest on loans to buy furniture and fees incurred when taking out mortgages or loans.

Relief will be phased in as follows:

2017 to 2018: 25% of the total finance costs will be capped at the basic rate

2018 to 2019: 25% of the total finance costs will be capped at the basic rate

2019 to 2020: 25% of the total finance costs will be capped at the basic rate

2020 on wards: 25% of the total finance costs will be capped at the basic rate

What should investors do about this change?

The good news is that you still have over a year and a half until this measure is phased in so there is time to plan your approach.

If you are looking to purchase a new buy to let property then you should consider setting up a limited company and buying the property through the company. This is because the restriction is limited to individuals. Whilst running a company incurs higher costs than a sole trader the potential savings would outweigh the additional costs involved.

Existing landlords still have time to consider how the will affect their tax change and potential measures available to them to counteract this. You can either do nothing and accept the higher tax charges, sell your portfolio and invest in other areas or transfer your property portfolio into a limited company.

If you would like more advice on how this will impact your tax charge and the options available please give us a call on 01202 331713.

Xero certified Accountant and ICAEW Chartered Accountant

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