Tax changes affecting finance costs Vs. rental income kicks in today!
As of today 6th April 2017 the ability to offset interest costs from rental income will start to bite.
Assuming you own investment property in your personal name and have borrowings against it, this tax year landlords will effectively only be able to offset 80% of the cost of the interest element of their loans from their rental income.
The 20% of rental income which is no longer off set by the interest costs will be treated as ‘personal income’ and taxed accordingly.
If you are a basic rate tax payer this increased personal income will be taxed at the basic rate. However, if you are a currently a higher rate tax payer this will be at the higher rate.
Come April 6th 2018 you will have 40% of the rental income which was off set by interest costs, no longer being off set.
A table showing the net effect of the tax changes is shown below:
|% OF COST ALLOWANCE||100||75||50||25||0|
|% GIVEN AS RELIEF AT 20%||0||25||50||75||100|
|EFFECTIVE INTEREST REDUCTION||100||80||60||40||20|
You may find as the years pass by between now and 2020 that as a basic rate tax payer this additional personal income is enough to push you into a higher rate tax bracket.
What can you do about this?
Option 1: Do nothing – accept the changes
Option 2: Sell everything
Option 3: Move the ownership of your property to a new legal entity E.g. Limited Company (Ltd)
If you are considering Option 3 then we advise that you should take some tax advice. We have teamed up with a 3rd party tax advisor and would be happy to refer your case through to them should you wish.
If you wish to switch ownership structure then B2B have a number of lenders who will lend to a Limited Liability Partnership (LLP), or a Limited Liability Company (LTD).
Rates start at circa 3% p.a and can cater for portfolios of up to 40 properties with ease. Portfolios above this size do require a little more negotiation with lenders.