At present interest on loans used in a property business gain full tax relief as an allowable expense. This includes mortgages and other loans that may have been used to purchase that property, finance repairs, etc. From April 2017, tax relief on interest in property businesses (including single buy to lets) will be restricted so that by 2020, interest will no longer allowable expense in computing the profits of the business. Interest but will attract tax relief at 20% which will be the lower of:
- finance costs not deducted from income in the tax year
- profits of the property business in the tax year
- total income (excluding savings income and dividend income) that exceeds the personal allowance and blind person’s allowance in the tax year
Any excess finance costs may be carried forward to following years if the tax reduction has been limited to 20% of the profits of the property business in the tax year.
If you are a higher rate tax payer then your tax relief will reduce from 45% to 20%.
The changes are being phased in gradually and deductions for interest from property income will be restricted to:
- 75% for 2017 to 2018
- 50% for 2018 to 2019
- 25% for 2019 to 2020
- 0% for 2020 to 2021 and beyond
If your loans have a low interest rate you won’t affected as severely by the changes but if you have a high interest rate on your loans you may find your tax bill increases dramatically.
Remember these changes are only relevant to individual landlords, if you operate your property business through a Limited Company then you can still claim tax relief for finance costs. The changes also don’t impact property that meets the criteria for a furnished holiday let.
It is important to get advice now on the impact these changes may have on your business so you have time to make any changes necessary. Don’t automatically think changing to a Limited Company is the answer as it may give rise to Capital Gains Tax and Stamp duty.
If you are a landlord and need help working out how this may impact your business please get in touch.