After the continuous drop of interest rates since the recession in 2008, interest rates finally rose in November to 0.5%. This is hardly groundbreaking as it is still a long way off 6% interest rates prior to the economic downturn. However, the Governor of the Bank of England announced on Thursday that interest rates are now forecast to rise at an accelerated rate.
Assuming the economy does continue to recover as expected by Mark Carney, there would be negative ramifications for many people. Despite the Government’s many incentives to assist first time buyers, such as the “help to buy” scheme and reduced stamp duty rates, young people are still struggling to get onto the property ladder. An increase in interest rates would make buying a property even less affordable for young people. This would be important in the South West where house prices are already out of the reach of many first time buyers.
It could also spell trouble for buy-to-let investors. Already the government has come down hard on rental landlords with the additional rates of stamp duty for second home owners and interest restriction on buy-to-let rental properties. An increase in interest rates would only make the effect of the interest restriction more severe.
By way of a reminder, from 5 April 2018 the interest restriction will gradually limit the amount of interest that can be deducted from rental profits. The remaining interest will be given as a basic rate tax reducer. For many buy-to-let landlords the new rules will see an increase in their tax liabilities.
In consequence to the increased interest rates many buy-to-let property owners may try to pass on this cost by increasing the rent. However this will only exacerbate the problem by further pushing people into higher rates of tax. It will also be bad news for those renting properties.
With the increase in interest rates and increase in tax liabilities becoming ever more pronounced, the question as to whether a “property incorporation” should be carried out should be revisited. This kind of incorporation is complex and should not be carried out without professional advice. If you are considering incorporating your property business, please do get in touch with your local Francis Clark Property Accounting and Taxation Adviser who would be happy to assist you.