Do you know how tax relief on buy-to-let property will work in 2020?
In this article, we look at how the tax relief on buy-to-let property will work by 2020, for example after interest is paid on loans.
Until 5 April 2017 interest paid on loans to buy a residential buy-to-let was fully tax deductible.
Since then, for individuals and partnerships it has only been partly deductible, and there will be no tax relief on buy-to-let property loans from 6 April 2020. Instead, partial relief, equal to the basic rate of tax 20%, is allowed as a credit against the tax payable on the rental income.
The restriction applies not only to interest to buy a property but other finance costs e.g. loan/mortgage arrangement fees.
It also applies to interest etc. paid on loans to improve residential let properties or buy furnishings for them.
The interest restriction can be completely avoided by transferring the let property to an existing or new company (although another restriction applies if its profits exceed £2million). A second advantage is that companies pay corporation tax at 19% (17% from 1 April 2020) instead of income tax at up to 45%.
But there are downsides including:
- Having been subject to stamp duty land tax (SDLT) or the equivalents in Wales and Scotland when you bought the property it will apply again when you transfer the property
- If the property has increased in value since you acquired it, there might be capital gains tax (CGT) to pay at 18% or 28%
- Having incurred legal costs when you bought the property there will be further legal costs for the transfer
- You’ll have to pay personal tax when you take the rental income from the company which could outweigh the tax saving made by avoiding the interest restriction.
If you’re considering getting into the buy-to-let market for the first time, note that most of the downsides don’t apply where you use a company to acquire a buy-to-let from scratch rather than transferring it from personal ownership.
An alternative approach…
If you have a spouse or civil partner (and in the right circumstances an unmarried partner) who pays tax at a lower rate that you, there’s a less problematic way to minimise or avoid the interest relief restriction.
If your taxable income means you pay tax at, say 40% while your spouse or partner pays at 20%, transferring all or part ownership of the property to them reduces the tax bill in two ways: firstly because of their lower tax rate and secondly because the interest etc restriction has less effect.
Unlike the transfer to a company, there’s no CGT to pay where the transfer is to a spouse or civil partner.
If the transfer is made as a gift, SDLT etc will only be payable if your spouse etc. doesn’t take on a corresponding share of the mortgage.
You can transfer 50% of the income for tax purposes, and so gain the tax advantages mentioned above, by transferring far less, say 5% of the property to your spouse etc.
Still baffled by the new rules on buy-to-let tax relief rules coming in 2020? You can always get in touch with one of our team and we’d be happy to advise you.