Buy To Let Finance
Tax relief restriction has affected buy to let landlords of residential properties if they are individuals, partnerships or trusts since April 2017.
This also effects UK landlords letting residential property overseas and non-UK resident landlords who let property out in the UK.
It doesn’t affect companies, and it doesn’t apply if you’re the landlord of a furnished holiday let.
But the rules affect finance costs and the tax relief you can get on them. And the scope is wider than commonly realised.
They don’t just affect mortgage interest on loans to buy property, they also cover interest on loans for general expenses or furnishings.
These rules also apply to tax relief for arrangement and other fees relating to loans. And they apply to costs relating to alternative finance arrangements such as Sharia compliant lending.
From 6 April 2018 the proportion of interest etc you’re allowed to deduct from your property income fell to 50% (from 75%) of the amount you pay.
This reduced the tax you’ll pay at basic and higher rates. For the other 50% you only receive basic rate tax relief.
Calculating the buy to let tax relief
As already mentioned, you can only knock off 50% of interest as a deduction from your rental income.
For the remainder, 20% of it can be claimed as a credit against your tax bill.
However, if the credit is more than either the tax on your rental income or savings income plus dividends, the credit is limited to the lowest of these, but you can carry the excess forward to use in a later year.
From 6 April 2018 the higher rate threshold kicks in sooner (and therefore so does the interest restriction).
The bad news is there’s no way around the rules unless you transfer your let properties to a company.
Not only will this mean you escape the finance cost restriction, but it could shelter rental profits from income tax (which can be up to 45%).
Corporation tax would be payable instead, but for 2018/19 it’s charged at just 19%.
Trouble is, transferring property can trigger other tax charges and so it might not be tax efficient overall. Therefore, take tax advice from your accountant before going down this route.
A more certain way to mitigate the effect of the restriction is to reduce the interest you pay, say by using savings to reduce borrowing.
The interest you save on borrowing is almost certain to outweigh what you could receive from savings. However, if you want to keep access to your savings consider switching to an offset mortgage/loan.