Residential SDLT is set to become more complex from 1 April 2021 with the planned introduction of the new 2% surcharge for non-UK resident purchasers of…
How relief is obtained and recent changes
Property is often purchased by way of a loan or mortgage. Historically, in calculating taxable property profits, a landlord could deduct the interest paid in respect of a loan or mortgage over let property as an expense against their rental income.
However, changes to the rules in April 2017 have seen the interest eligible for relief as an allowable deduction against an individual landlords’ property income gradually reduce, with the balance only eligible for relief at the basic rate of income tax (currently 20%) as a set off against the landlords ultimate tax liability:
|Tax Year||Amount of interest allowable as a
deduction against property income
In the 2020/21 tax year, taxpayers are not receiving any relief for interest paid against their property income and relief will only be able to obtained by way of a basic rate tax reducer (at 20%).
The impact of the changes
There changes will ultimately mean that higher rate taxpayers who in 2016/17 could have received 40% tax relief for their loan interest expenditure will now only receive basic 20% tax relief against profits charged to tax at the higher rate of 40%. For additional rate taxpayers, the impact will be worse still.
Many landlords will have already noticed their tax liability increasing year on year as a result of these changes but the full impact of the changes has only been realised now.
These changes can make renting a property a potentially unsustainable venture for a higher rate taxpayer, with the tax due on the rental income actually exceeding the profit before tax.
The inability to deduct loan interest directly from rental income increases an individual’s net income which can cause a reduction, or complete loss, of their personal allowance.
Further, for those landlords in households currently in receipt of child benefit, an increase in their net income as a result of these changes may give rise to a high income child benefit charge where their adjusted net income creeps above £50,000.
Are there any solutions?
The recent changes to the rules concerning loan interest relief currently do not apply in respect of loans on property rented out as a qualifying furnished holiday let (FHL) or in respect of rental property owned by a company.
Landlords my wish to consider the options open to them in relation to property structure as discussed in a recent blog here. As my colleague Tania Donald notes, incorporation is not a one size fits all solution and there are often other avenues available to mitigate the impact of the loan relief restrictions. For instance, transferring an interest in a rental property to a basic rate taxpaying spouse may enable full mortgage interest relief.
There are a number of tax and other considerations to take into account to evaluate the best option for each landlord client. We work proactively with landlords to discuss options open to them and plan for a structure that meets their aims. If this is of interest, please get in touch with a member of our team.