Advice from the experts: Mortgage interest tax relief
Garbutt & Elliott have produced an advice report which contains specific detail which will be of interest to property investors in light of the recent changes to mortgage interest tax relief, and goes onto what their options may be to avoid/reduce the impact of the April 2017 charges.
If you have any questions about this and you would like to talk though any of the changes, get in touch with one of our team.
Commentary on finance costs tax relief changes from 6th April 2017
Property landlords have suffered what has felt like a sustained attack from the Government in recent years. In April 2016, we saw the 3% hike in Stamp Duty Land Tax for the purchase of second homes and the abolition of the 10% Wear & Tear allowance, leaving landlords only able to claim tax relief for the cost of replacing the furniture, furnishings, appliances and kitchenware but not the initial cost.
First announced in the 2015 Summer Budget was perhaps the most controversial change, and one that is expected to have the biggest impact on the buy-to-let market. The proposal was to restrict tax relief finance costs for residential landlords to the basic rate of income tax. However, the detail behind this headline and the way in which the changes are being introduced needs more explanation.
What are the changes?
From April 2017, finance costs will no longer be deductible from rental profits for tax purposes. Instead, landlords will receive a basic rate reduction from the income tax liability for their finance costs.
The restriction to tax relief on finance costs will phased in over a four year period, between April 2017 and April 2020. In the transitional years landlords will be able to claim:
|% of finance costs||2017/2018||2018/2019||2019/2020||2020/2021|
|Deductible from rental profits||75%||50%||25%||0%|
|Given as basic rate deduction||25%||50%||75%||100%|
Finance costs will generally mean mortgages, loans (including loans to buy furnishings) and overdrafts. But finance costs can also include fees and other incidental costs for obtaining and repaying mortgage and loans.
Who does it affect?
The changes affect landlords who are higher rate taxpayers, as the tax relief they receive on finance costs will be reduced from 40% to 20%.
They apply to individuals, not to companies. So property letting portfolios held within a company are not affected.
They apply to residential property – not to commercial property, nor Furnished Holiday Lettings.
What other impact can it have?
Due to the way the relief is restricted, the changes can result in the landlord’s income levels increasing. This can have adverse effect:
- It could push a basic rate taxpayer into higher rates (which can impact not only rates of income tax but also capital gains tax)
- It can affect entitlement to Child Benefit (if total income exceeds £50,000 and triggers the High Income Child Benefit Charge
- It can restrict or remove entitlement to the Personal Allowance (currently worth £11,000) if total income exceeds £100,000
Interest rate increases on the way?
With interest rates anticipated to increase over the coming years due to a variety of economic factors, these tax relief restrictions are likely to have an even greater impact. So it is important that landlords are aware of the financial impact of the changes and consider their options.
Garbutt & Elliott, accountants in York and in Leeds, delivering forward thinking and advisory financial advice to our clients.