Landlords and the Restriction of Mortgage Interest Relief
In July 2015 George Osborne announced that the Government will restrict relief on mortgage interest payments and other finance costs to the basic rate of income tax, 20%, for all individual landlords of residential property.
This restriction will be phased in over four years beginning from April 2017.
Currently, landlords can claim relief for all of their mortgage interest payments against their rental profits, and so can obtain relief at 40% or even 45%.
However, it is not only those landlords who currently pay tax at 40% or 45% that will be affected. Those who currently pay tax at the 20% basic rate may be pushed into the 40% higher rate as a result of the changes.
What can be done to lessen the impact?
As the restriction is being phased in from 2017, there is time for landlords to consider their options and to think about ways in which they can lessen the impact.
If you are a residential landlord and you think the restriction may affect you, some straightforward suggestions are:
- Consider borrowing more against commercial property.
- If you have a trading company that owes you money, draw down this money and borrow within the company. Another option is to lend monies from new borrowings back to the company as full tax relief may then be available.
- Consider transferring ownership or part ownership of properties to spouses or family members who pay tax at the basic rate. There may be capital gains tax implications so advice will be needed.
- Making pension contributions to increase the basic rate tax band available (although there are limits on the amount of pension contributions that can be paid.
- Consider whether it is worthwhile incurring additional expenditure, for example repairs, to reduce higher rate tax liabilities.
- Ensure that every possible tax deductible expense is being claimed.
- Make sure that existing mortgages are at the best possible rate.
What about substantial property portfolios?
For substantial property portfolios more complex strategies are possible, for example:
- Transferring property into a limited company - the new rules don’t apply to companies so full relief would still be obtained for mortgage interest costs. However without careful planning transferring the property into a company could trigger a capital gains tax charge and stamp duty land tax could be payable. Mortgage lenders would have to be informed of the transfer, and new mortgage terms agreed.
- In some circumstances a management company could be used to charge a management fee for services provided which would reduce personal rental profits. Care would need to be taken regarding the set up and operation of the company, and there would be company running costs to consider.
Our overall advice to landlords is to consider the impact the changes will have on their tax position and to seek our advice if they would like to explore any of the above suggestions in more detail.