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Loan Interest on Let Residential Properties

Starting on 6 April 2017 there are changes to the way that you get tax relief on mortgage or loan interest for let residential properties.

 

Over 3 years the relief will slowly be restricted so that it is of no use for you if you are not a taxpayer or if you have losses on your let property. And if you are a higher rate taxpayer, the relief’s efficacy will be halved.

 

This is because the relief is now to be given as something called a “Tax Reducer” and limited to 20% only.

 

The differential can be explained in each of the three situations as follows:

 

Income within Personal Allowance

 

Current Situation

Situation wef 2020/21

 

 

 

Profit before mortgage interest

15,000

15,000

Less

 

 

Mortgage Interest

(5,000)

-

Taxable Profit

10,000

15,000

Personal allowance (say)

(11,000)

(11,000)

Liable to tax

NIL

4,000

Tax Due

NIL

800.00

Mortgage Interest at 20% (£5,000 * 20%)(Limited to tax liability)

-

(800.00)

 

Wasted” Mortgage Interest

 

£1,000

 

Losses

 

Current Situation

Situation wef 2020/21

 

 

 

Loss before mortgage interest

15,000

15,000

Add

 

 

Mortgage Interest

5,000

-

Loss to carry forward

20,000

15,000

Mortgage Interest at 20%

-

-

Wasted” Mortgage Interest*

 

£5,000

*Unused loan interest can be carried forward and set against future rental profits; however the rule of thumb is that the tax reduction is based on the smaller of:

    1. The finance costs disallowed from deduction against rental profits or

    2. The rental profits for the year (net of any losses brought forward)

 

Higher Rate Taxpayer

 

Current Situation

Situation wef 2020/21

 

 

 

Profit before mortgage interest

15,000

15,000

Less

 

 

Mortgage Interest

(5,000)

-

Taxable Profit

10,000

15,000

Tax Due at 40%

4,000.00

6,000.00

Mortgage Interest at 20% (£5,000 * 20%)

-

(1,000.00)

Tax Due

£4,000.00

£5,000.00

Additional tax liability

 

£1,000.00

 

As can be seen, the change of rules will affect a lot of landlords – and this is from a tax point of view only. Once you look at the affordability of mortgages and loans without the associated full tax relief, rental businesses start looking less attractive.

 

Please note that the new rules affect individual taxpayers only. Let residential properties within a company are not affected and it may be that incorporation of your rental business is a potential way to avoid these new onerous rules.

 

As ever, the impact on you of the new rules will depend on your particular circumstances. These new rules start to hit in 2017/18 and reach full effect in 2020/21 and so you may want to discuss with your normal robinson+co contact the future of your rental business.

 

We can be contacted on 01900 603623, 01946 692423 and 019467 25808.

 

Note: The figures above are for illustration purposes. They do not constitute advice and should not be considered as such. No responsibility can be accepted for any losses arising to any person acting or refraining from acting as a result of this material.

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