Property taxation reforms

The good news is that the rent a room tax relief limit will increase from £4,250 to £7,500 from 6 April 2016.

The relief applies where you rent out a room or rooms in your main residence. However, this is still not quite enough to cover the average monthly room rental in London of nearly £700, but only a small excess is left taxable.

The other news is not so good. From 6 April 2020, relief for interest and other finance costs will be restricted to the 20% basic rate. There will be a gradual introduction so the restriction will apply to a quarter of finance costs for 2017/18, half for 2018/19 and three-quarters for 2019/20. In most cases, landlords will have used the finance to buy the let property, but it could also have been used to fund major repairs or furnishings. The restriction will also apply to fees incurred when taking out or repaying mortgages or loans.

Example
A higher rate taxpayer has a buy-to-let property which cost £200,000, being financed by a £150,000 mortgage with a 3.5% interest rate.

	2015/16	2020/21
		£
Rental income	£8,400	£8,400
Mortgage interest	(£5,250)
Profit	£3,150	£8,400
Tax at 40%	£1,260	£3,360
Relief for interest at 20%		(£1,050)
Tax cost	£1,260	£2,310

 

The tax cost in 2020/21 represents 73% of the true rental profit, and the worry for many is that an interest rate rise will leave them paying more tax than there is profit available to pay it. Even someone who is currently a basic rate taxpayer could be affected if the extra profit pushes them into the 40% bracket.

Apart from trying to raise rents to cover the tax cost, other solutions are somewhat more drastic. Anyone who owns property outright without finance is not affected by the changes, so if you have a portfolio of properties you might be able to sell some in order to reduce or completely repay mortgages. A company structure will avoid the finance costs restriction, but generally comes with other tax complications – although it may suit a new entrant to the buy-to-let market. Many may just sell up.

You have until 6 April 2017 to plan, and as always we are here to help.

 

In this edition

This newsletter is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking any action on the basis of the contents of this publication. The newsletter represents our understanding of law and HM Revenue & Customs practice as at 1 October 2015.