The Additional Dwelling Supplement which came into effect was well publicised and led to a rush of transactions to beat the additional 3% slab tax on acquisition of a residential property which was not the purchaser’s main residence. However, there has not been the same level of exposure in relation to the changes which will take effect on 6 April 2017 to restrict income tax relief for financing costs for residential property.
What is going to happen?
Under the new rules, "rental profits" and taxable income will be determined without taking account of interest payments by the borrower/owner. Relief for interest paid will be given as a “tax reduction” equal to basic rate tax on the interest payments.
For the financial year 2017/18, the new rules will apply to 25% of the interest in 2017/18, 50% in 2018/19 and 75% in 2019/20 with 100% of the interest being subject to the new rules from 6 April 2020 [i.e. no allowance from that date for any interest at all].
The changes to the tax relief will not just result in a higher rate taxpayer paying additional tax equal to 20% of the interest paid (or 25% if an additional rate taxpayer). The changes may also lead to:
- Tax being paid on rental income when there is a loss after deducting interest
- The landlord moving from the basic rate to the higher rate of tax
- Tax on child benefit if taxable income exceeds £50,000
- Loss of personal allowance where taxable income exceeds £100,000
What can you do about it?
The restriction on the available tax relief does not apply to companies. For some landlords moving the properties to a company of which the landlord is a director and shareholder may result in substantial tax savings. The transfer may be done legitimately without a charge to capital gains tax or LBTT if certain conditions are met.
There is a need to act quickly and early with your lawyer and tax adviser to check that incorporation may be achieved without a tax charge and if, depending on the circumstances of the individual, incorporation will be beneficial.
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