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Landlords – Tax relief for mortgage interest

Please note that the information herein is of a general nature and you should not act or refrain from acting on it without professional advice on the specific facts of your case. No liability is accepted by the author or Sykes Anderson Perry Limited in respect of this article. This is a complex subject and the above is a basic outline only and is intended only as a general guide. Nothing herein constitutes financial advice.

Traditionally, buy to let investors have leveraged their property interests with interest-only mortgages. There were a number of commercial reasons behind this but it was useful that the interest could be claimed as a full tax deduction when assessing the tax due on the rental profits.

This could be particularly beneficial as there was scope to claim a deduction for interest on re-mortgages as well. So some equity could be released from the property’s value and the interest could still be claimed as a tax deduction provided the loan capital was up to the value of the property when it was first used as a rental (so long as the loan was for the purpose of the property business).

Over recent years there have been numerous tax changes which penalise buy to let investors. One of these is a restriction on the relief which can be claimed for mortgage interest. This is being introduced gradually from 6 April 2017.

The result is that landlords will only receive a basic rate reduction from their income tax liability for their mortgage interest (and other finance costs). This is staggered as follows:

  • in 2017 to 2018 the deduction from property income was restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction

  • in 2018 to 2019, 50% finance costs deduction and 50% given as a basic rate tax reduction

  • in 2019 to 2020, 25% finance costs deduction and 75% given as a basic rate tax reduction

  • from 2020 to 2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction

In light of this change it is sensible to review how your investments are structured. For example, should ownership of the property be with a basic rate taxpayer? Could you consider a transfer of the property to a company where a full deduction would be obtained? Can you re-structure your other income so that the rental profits fall within your basic rate of tax? We are able to assist and consider the other tax implications of any re-structuring (when property is involved, capital gains tax and stamp duty land tax will have to be considered).

October 2018