Posted on 13 July 2015
Individual owners of residential property are currently able to deduct the full interest costs from borrowings in respect of their property business.
The Government announced the introduction of a restriction on relief which will be phased in from 6 April 2017. This will operate as follow:
2017/18 - 75% interest full deduction: 25% interest relieved at basic rate of income tax;
2018/19 - 50% interest full deduction: 50% interest relieved at basic rate of income tax;
2019/20 - 25% interest full deduction: 75% interest relieved at basic rate of income tax;
2020/21 - 100% interest relieved at basic rate of income tax.
The basic rate relief on interest will be given as a tax reduction in the individual’s tax computation for the year, rather than as a deduction from the rental profit. The tax reduction will be 20% of the lower of the interest affected, the rental profits, and the individual’s income (excluding savings and dividend income) for the year. Where the affected interest exceeds the rental profits in a year the excess will be carried forward for potential relief in subsequent tax years.
These changes will affect only those individuals who are liable to higher or top rates of income tax. The proposal indicates that it will apply only to individual property owners and it remains to be seen whether the rules will also apply to properties owned through trusts and other entities which pay income tax on rents. UK companies letting residential property, which are subject to corporation tax on their profits, would not seem to be affected. This creates a potential mismatch in the treatment of loan interest for different forms of property business and, as such, ought to be a consideration when assessing the ownership structure of such properties. When assessing how properties are held it will also be necessary to consider the changes announced in respect to the taxation of dividends.
Do you have a portfolio of buy to let properties? If so, will they still be held in the most tax efficient manner post the changes annoynced in the budget? Smith cooper would be happy to discuss the implications with you. Contact our expect, Jackie Hendley here
To find out more about what's in this summers budget, read our full summaries here