The Chancellor announced that the amount of income tax relief landlords can get on residential property finance costs (such as mortgage interest) will be restricted to the basic rate of tax.
To give landlords time to adjust, the change will be phased in gradually over 4 years:
2017/18 – the deduction will be restricted to 75% of finance costs, with 25% being available as a basic rate tax reduction.
2018/19 – 50% finance costs deduction and 50% given as a basic rate tax reduction
2019/20 – 25% finance costs deduction and 75% given as a basic rate tax reduction
From 2020/21 – all financing costs incurred by a landlord will be given as a basic rate tax reduction
Planning points to consider are as follows
- Do you have equity within your portfolio to enable you to refinance? You can borrow up to 100% of the value of the let property when first let and still obtain a full interest deduction. For example if you originally borrowed £75,000 on a property worth £100,000 and the property value has increased to £133,333 could you borrow an extra £25,000 on the property and say use this money to reduce your personal mortgage?
- Is it worth incorporating your portfolio into a limited company? There may be stamp duty and bank costs to pay. There also may be capital gains tax to pay if not structured properly. This should only be considered by people with large portfolio’s paying tax at 40% or 45%. There is also tax on tax do pay when the portfolio is liquidated.
- Can you transfer the ownership of the property to a spouse paying tax at a lower rate? This does have potential stamp duty and bank borrowing consequences.
- Should you consider selling some property? You need to be aware of any capital gains tax payable.