Landlord Interest Changes

In the Summer Budget in July 2015 the government dropped a bombshell on Landlords. Starting in April 2017 the tax relief on interest and other finance costs on the rental of residential will be reduced dramatically. Along with the increase of 3% on Land and Buildings Transaction Tax this is going to fundamentally change the economics of buy to let.

The way in which this will work is that instead of getting tax relief on the payments directly the landlord will get a 20% tax reduction for these costs. There are two imediate effects of this. Firstly higher rate taxpayers will not receive 40% or 45% tax relief on their interest payments. Secondly some lanmdlords who are currently basic rate taxpayers will end up as higher rate taxpayers and/or lose their child benefit.

The changes are getting phased in. The schedule is as follows:

2017/18: 75% Deducted as normal, 25% as Basic Rate Reduction

2018/19: 50% Deducted as normal, 50% as Basic Rate Reduction

2019/20: 25% Deducted as normal, 75% as Basic Rate Reduction

2020/21: 0% Deducted as normal, 100% as Basic Rate Reduction

To give an example, this means that in 2020/21 a higher rate tax payer who was receiving £20,000 in rental income and deducting £10,000 in interest will have thier tax change from £4,000 currently to £6,000 under the new regime.

This change only applies to residential property, not commercial or holiday lets. It also doesn’t apply to Companies that own residential property.

Clearly landlords should be planning ahead for these changes. There are a number of ways that this extra tax bill could be mitigated. Among others some examples are:

  • Transferring property to a spouse with a lower income
  • Selling Property
  • Transferring Property to a Company
  • Increasing Personal Pension Contributions
  • Increasing the rent to cover the additional tax bill

All of these options have pros and cons. This is going to be a complex decision for landlords with consequences that could last for decades. If you would like to discuss your options please give us a call.