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 doesnโt 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 youโre not in the firing line if youโre the landlord of a furnished holiday let, youโre 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 donโt just affect mortgage interest on loans to buy property, they also cover the interest on loans for general expenses or furnishings. And itโs 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.
Whatโs Changing from April 2018?
From 6 April 2018, the proportion of interest youโre allowed to deduct from your property income falls to 50% (from 75%) of the amount you pay. This reduces the tax youโll pay at basic and higher rates. For the other 50,% youโll only receive basic rate tax relief.
Calculating the tax relief. As 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.ย From 6 April 2018, the higher rate threshold kicks in sooner (and therefore, so does the interest, etc. restriction) for Scottish taxpayers (seeย The next step ).
What can you do about the Death of Buy To Let Finance?
The bad news is thereโs no way around the rules unless you transfer your 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, itโs charged at just 19%. The trouble is, that 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.
