When George Osborne set out the first budget of the Conservative government, a significant change was announced to the taxation of private landlords which will increase the tax burden for many financing their rental portfolios with borrowings.
Under the current scheme of taxation, any interest on borrowings secured to purchase or enhance rental properties is allowed as a deduction against the taxable income from those rental properties.
Effectively, therefore, any loan interest attracts tax relief at the taxpayer’s effective rate of tax, so a higher rate taxpayer, for example, would receive relief at their 40 per cent rate of tax.
From 2020, loan interest will only attract tax relief at the basic rate of income tax of 20 per cent, irrespective of what rate the taxpayer pays.
The mechanics of the tax change have not yet been fully released, but there are situations where the additional tax charge can be even worse.
Where an individual earns income in excess of £100,000, their personal allowance is gradually reduced to zero.
As the expected method of restriction means that loan interest is ignored for determining taxable income, with a tax credit being received at 20 per cent for the loan interest, some individuals’ taxable income may now be in excess of the £100,000 limit, despite no additional income being received.
The only good news is that this restriction in relief is to be phased in gradually from 2017, with only 25 per cent of the interest being restricted in that year, increasing to 100 per cent by 2020.
This will be scant consolation to landlords, however, especially those who have built their business model around their investment.
Given that some properties may have significant chargeable gains, there may not even be an easy route out of the position if properties have been remortgaged following recent house price increases.
It is better to take action sooner than later. For help and advice, call Duncan & Toplis on 01529 303773.
Keith Phillips is a partner at Duncan & Toplis acountants in Sleaford.