Private Landlords, loss of valuable tax relief

houses-facades-510514_1920The 2015 Budget announced restrictions of the tax relief of interest payments relating to buy to let mortgages.

Mortgage interest which was previously deductible as a tax allowable expense for private landlords will now be allowable as a deduction, only at the lower rate of income tax.  Landlords falling into the higher rate tax band will pay more tax.

The loss of relief is being phased in from 2017/18.

The lack of tax relief will push many landlords, into a loss making position.

For example; Monthly rent on Property £750, (£9,000 per annum).  Mortgage interest is 5% on £130,000 mortgage, (£6,500 per annum).  Other tax allowable expenses, annually are £500.

The taxable profit to a landlord who is a higher rate taxpayer is £2,000, on which he pays £800 in income tax.  In effect the mortgage interest has attracted tax relief at 40%.  Post tax profits are £1,200.

Under the new rules the mortgage interest is allowable only at the lower rate of tax , 20%, so £6,500 x 20% = £1,300 of tax relief is lost.  The income tax bill increases by £1,300.  The tax payer is in a loss making position.

What are the solutions..

Fortunately the changes are being phased in over time so there is time to act.

  1. Transfer property portfolio into a limited company. Mortgage interest relief remains fully tax allowable for corporation tax purposes.  However, this requires careful consideration / detailed planning as there may be a capital gains tax charge on the way in.  The rules for dividend income has changed from 6th April 2016; the first £5,000 are tax free, then taxable at 7.5% for lower rate taxpayers and then 32.5% for higher rate tax payers.
  1. There may be an opportunity to assign the property rental income to a spouse who has is not using their lower rate bands.
  1. Re-mortgage to reduce the interest rate charge.