Changes ahead for taxation of residential property income
In the summer budget of 2015 the government announced changes that could have a significant impact on individuals, partnerships and trusts that are taxed on property income.
The government plans to restrict the amount of income tax relief landlords can get on residential property finance costs, to the basic rate of income tax. Finance costs include mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans.
Landlords will no longer be able to deduct all of their finance costs from their property income. Instead they will receive a basic rate reduction from their income tax liability for their finance costs. To give landlords time to adjust, the government will introduce this change gradually from April 2017, over four years.
This restriction will not apply to landlords of furnished holiday lettings or commercial premises.
Landlords likely to be affected, are those with a relatively high level of interest in relation to their borrowings for residential property.
So what could it mean for you?
If you are a higher rate tax payer this will increase your tax liability.
A restriction to finance costs will effectively increase taxable profits from property income. This could push income above £100,000 resulting in a loss of personal allowance and even more tax to pay.
In extreme cases, this has the potential to turn a profitable residential property business into a loss making position.
There is potential for income to exceed £50,000 which if in receipt of child benefit could result in an additional charge to income tax.
For a base rate tax payer this could push income into the higher rate tax banding resulting in additional tax to pay.
What impact will potential interest rate rises have on your property business, in combination with a restriction to the relief of income tax?
While these changes are not due to take effect for just over a year, the time to consider their impact is now. You need to know what this means for you. You should consider what action you could take and give yourself sufficient time to plan accordingly.
If you have an advisor they should have already discussed this with you, and what you can plan to do about it.
If they are yet to do so or until now you have been happy managing your own property income but would like to know more, then contact us and see what we can do for you.