15 Jan
The Death Of Buy To Let Finance
Phasing in the restriction for tax relief on finance costs began in 2017/18. The next stage takes effect on 6 April 2018 with amendments in Buy to let Finance. How can you benefit from your buy to let property and what steps can you take to maximize your impact?
Landlords – is it you?
Since April 2017 the tax relief restriction has affected landlords of residential properties if they are individuals, partnerships or trusts. It doesn’t affect companies. It also affects UK landlords letting residential property overseas and non-UK resident landlords who let property in the UK.
Tip. The good news is that you’re not in the firing line if you’re the landlord of a furnished holiday let, you’re dealing in land and property, or run a development business.
A Wide Effect
The rules affect finance costs and the tax relief you can get on them. The scope is wider than commonly realised. They don’t just affect mortgage interest on loans to buy property, they also cover the interest on loans for general expenses or furnishings. And it’s not only interest – the rules apply to tax relief for arrangement and other fees relating to loans, or costs relating to alternative finance arrangements, e.g. Sharia-compliant lending.
What’s Changing from April 2018?
From 6 April 2018, the proportion of interest etc. you’re allowed to deduct from your property income falls to 50% (from 75%) of the amount you pay. This reduces the tax you’ll pay at basic and higher rates. For the other 50% you’ll only receive basic rate tax relief.
Calculating the tax relief. As we’ve already mentioned, you can only knock off 50% of interest etc. as a deduction from your rental income. For the remainder, 20% of it can be claimed as a credit against your tax bill. However, if the credit is more than either the tax on your rental income or savings income plus dividends, the credit is limited to the lowest of these, but you can carry the excess forward to use in a later year (see The next step ).
Trap. From 6 April 2018 the higher rate threshold kicks in sooner (and therefore so does the interest etc. restriction) for Scottish taxpayers (see The next step ).
What can you do about Death of Buy To Let Finance?
The bad news is there’s no way around the rules unless you transfer your let properties to a company. Not only will this mean you escape the finance cost restriction, but it could shelter rental profits from income tax (which can be up to 45%). Corporation tax would be payable instead, but for 2018/19 it’s charged at just 19%. The trouble is, transferring property can trigger other tax charges and so it might not be tax efficient overall. Therefore, take tax advice from your accountant before going down this route.
Tip. A more certain way to mitigate the effect of the restriction is to reduce the interest you pay, say by using savings to reduce borrowing. The interest you save on borrowing is almost certain to outweigh what you could receive from savings. However, if you want to keep access to your savings consider switching to an offset mortgage/loan.
Example Calculation
Jibran Qureshi FCCA is the Managing Director of Clear House Accountants, and has over 10 years of experience in practice and across multiple industries. Jibran’s educational background includes a Master’s in Financial Strategy from Oxford University and an Executive MBA from Hult International Business School. His experience in Financial Strategy, Tax Planning, Operational Consultancy and Performance Reporting guide his cognizant approach to leading Clear House and its clients to the future. It was this dexterity that led him to be Enterprise Nation’s Top 50 Advisors.
Jibran is fueled by his passion for helping businesses. He unequivocally believes that as business advisors and accountants for our clients, it is our responsibility to work with them as business partners. As specialists, it is our duty to help our clients navigate through the complexities of constant change and the implications that come with it.
Over the past decade, innovative disruptions have changed the way businesses work, everything from cloud software, innovative business models, to AI and machine learning, have impacted how businesses operate, grow, and expand.
Jibran recognized the need to manage these disruptions sustainably, early on and shaped Clear House Accountants to not just be compliance specialists, but advisors who help build complex ecosystems around cloud accounting software, provide advice on funding support, help manage innovative tax schemes, set up and implement complex strategic plans, and much more. So, his clients can thrive, not just survive.
Jibran developed his prime role as the Managing Director to build Clear House’s capabilities so it can add value for their clients. He is of firm belief that this can be done through consistent high-level training, building the right tools, and creating roadmaps to help businesses cope with prospective disruptions. He envisages that every client that comes on board, is provided maximum value through onboarding, ongoing services and the right mix of tools to help them become the best in the world.