Muras Matters: Summer Budget 2015 Mortgage Interest

Summer Budget 2015

Mortgage Interest

 

Background

During the Summer Budget this month, the Chancellor announced significant changes to finance costs for residential rental property starting from April 2017. This only affects property owned by individuals, it does not apply to property owned by a company nor does it apply to Furnished Holiday Lets. Currently, interest costs are fully deductible where the mortgage has been used to purchase a residential rental property, in future mortgage interest and other finance costs will be restricted for higher earners.

Phased introduction

Where the rental property is owned by Basic rate (20%) tax payers, i.e. taxpayers with income under £42,700 in the 2016/17 tax year, the finance costs are still fully deductible, although the manner of deduction will change.

Higher (40%) and Additional (45%) tax payers will be affected by the changes, which will be phased in over four tax years as follows:

  1. From April 2017 the deduction from rental income will be restricted to 75% of the total interest cost, with the remaining 25% being available as a basic (20%) rate tax reduction.
  2. Starting in April 2018, 50% of the interest will be a normal deduction and 50% given as a basic (20%) rate tax reduction.
  3. In the 2018/19 tax year, 25% of the interest will be deducted from rental income and 75% given as a basic (20%) rate tax reduction.
  4. From April 2020 all financing costs incurred by a landlord will be given as a basic (20%) rate tax reduction.

Tax Reducer

Where the interest is given as a basic rate tax deduction, it is deducted at 20%. Previously a £1,000 interest cost would have saved tax at 40% and 45% for Higher and Additional rate payers, from April 2020 it will only save tax at 20%.

For example:

A Higher (40%) rate payer with annual rental income after other expenses of £15,000 and mortgage interest costs of £2,000 each year will have taxable rental income in 2016/17 of £13,000.

In 2017/18, the taxable rental income will be £13,500 (£15,000 less 75% of £2,000) with £100 (£500 at 20%) deducted from their tax liability.

In 2018/19, the taxable rental income will be £14,000 (£15,000 less 50% of £2,000) with £200 (£1,000 at 20%) deducted from their tax liability.

In 2019/20, the taxable rental income will be £14,500 (£15,000 less 25% of £2,000) with £300 (£1,500 at 20%) deducted from their tax liability.

In 2020/21, the taxable rental income will be £15,000 with £400 (£2,000 at 20%) deducted from their tax liability.

How we can help

The effects of these changes can be mitigated in a number of ways, for example you may wish to consider:

  1. Transferring ownership to a lower earning spouse;
  2. Owning your rental property through a limited company;
  3. Investing in commercial property, which is not affected by these changes;
  4. Invest in a Furnished Holiday Let, which is also unaffected.

All the above items come with pitfalls and criteria so please contact us for advice before implementing any of them.

These changes will come into effect from 6 April 2017, leaving time to review property portfolios to ensure the structure is as tax efficient as possible.

This is a general overview of draft legislation which may change before it receives Royal Assent and becomes law. If you want further details on mitigating the effects of these changes or you are concerned about your potential tax liability generally please contact our Tax Director, Jenny Marks.

To see our other news items please visit our Muras Baker Jones – Blog.