RESTRICTION ON INTEREST RELIEF ON RESIDENTIAL BUY TO LET PROPERTIES

As many owners of rental properties will be aware, from 6 April 2017 there is a restriction on the tax relief available on mortgage interest on residential Buy to Let (BTL) loans. The restriction, which is being phased in over 4 tax years to 2020/21, will eventually limit tax relief to the basic rate of income tax, currently 20%.

For a 40% tax payer (usually taxable income over £44,000) the staggering of the restriction means that over the next 4 years, tax relief on interest will be reduced by 1/8 each year to 50% of its 2016/17 level by 2020/21. For example, a 40% taxpayer paying £2,000 in BTL mortgage interest each year will currently be entitled to £800 of tax relief; this will reduce by £100 a year to £400 by 2020/21. As income is assessed before interest is deducted, more people will find themselves in the 40% tax bracket.

This, combined with the extra 3% Stamp Duty applying to additional residential homes being purchased, amounts to a significant increase in the tax burden relating to owning residential rental property.

The tax relief restriction does not apply to companies letting residential properties, so we are experiencing an increase in requests by individuals and couples wishing to set up a limited company to acquire properties they would like to buy for rental purposes. However, the increase in Stamp Duty still applies and commercial BTL mortgage rates tend to be higher than personal rates.

In some very restricted circumstances, it is possible to transfer existing rental properties into a limited company, taking advantage of incorporation relief to hold over Capital Gains, and in even more limited cases, to avoid payment of Stamp Duty on such a transfer.

If you would like to know more, please email peter.morris@torrwaterfield.co.uk or call 0116 2423400

What Changes in April 2016? (Part 3 – Property Tax)

The last of our blogs in this series is upon us! Let’s take a look at the changes in the area of property tax, starting with a little gem that was announced in December 2015’s Autumn Statement….

From 1 April 2016, there will be a 3% higher rate of Stamp Duty Land Tax (SDLT) on the purchase of additional residential property (i.e. the rates charged will be 3% above the usual rates).  This will apply to second homes as well as buy-to-let properties, but will also affect those who are moving home where there is a time difference between buying their new house and selling the old one – the higher rate SDLT will be payable on the purchase of the new house, but will be refunded if the old one is sold within 18 months.

Tax planning tip: If you are looking to buy a second home or buy-to-let property, complete the transaction before 1 April 2016 to avoid the additional tax.

From 6 April 2016, Wear and Tear Allowance (which was only available to landlords of furnished properties) will be scrapped and replaced with a new relief which allows all residential landlords to deduct the actual cost of replacing furnishings.  The key word here is “replace” – no relief is available for the initial purchase.

Tax planning tip: If your rental property needs any of the furnishings replacing, delay the expenditure until 6 April 2016 or later – that way you will get the tax relief.

You’ve probably heard about the new restrictions being brought in for mortgage interest relief on buy-to-let residential properties – this doesn’t come in until April 2017, so we will blog about this specifically at a later date.  For a bit more detail on it now, check out our Spring 2016 News Focus at http://www.torrwaterfield.co.uk/news/newsletters/spring-2016.

Katie Kettle, Technical Manager Katie Kettle Colour