Despite the reporting in the news that there is a decrease in the demand for buy to let properties by landlords due to changes in taxation, property is still seen as a solid investment. Not only is it a tangible asset (as opposed to stocks and shares), it generates both an income and, hopefully, a capital return. However, the taxation changes referred to have not yet fully kicked in and the impact is staged, so things will only get harder for buy to let landlords.
To recap, the changes imposed a tax relief restriction for individuals, partnerships and trusts, but not companies, on the amount of interest those landlords can claim against your residential property income. Currently at a 25% restriction, meaning that only 75% of interest is allowable at higher rates, from 6 April 2018 only 50% will be available at higher rates, meaning that for half of the interest paid, only basic rate relief is given. It is calculated by deducting the 50% of the interest from rental income, and for the remainder a 20% credit is given against the tax bill, though not so as to create a refund. Any excess credit can be carried forward. This situation is set to continue in future years, when the restriction rises to only 25% available at higher rates and then zero from 6 April 2020.
What can be done to limit the impact? By transferring residential investment properties to a company, which is outside the scope of these rules, the restriction can be avoided, but care should be taken not to trigger other taxation effects, such as CGT and Stamp Duty. The other way is to use savings to reduce the level of borrowings. Although this is unappealing to some through the use of free cash, turning to offset or flexible mortgages does mitigate this disadvantage.
As with matters of this importance, consult your trusted advisor before doing anything to avoid unintended tax exposure.
Please see our factsheet for further information – https://www.hwca.com/app/uploads/2015/02/Property-Investment-Buy-to-Let.pdf
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