Tax relief for residential landlords
Tax relief has changed significantly, with reductions in the deductibility of finance costs phased in from 6 April 2017. Costs affected include mortgage interest, interest on loans to buy furnishings, and fees connected with taking out and repaying loans and mortgages. Going forwards, landlords get tax relief for finance costs via basic rate (20%) reduction from their income tax liability.
In 2019/20, only 25% of finance costs are deductible from rental income, and the change is fully effective from 6 April 2020, when 0% of finance costs are deductible from rental income and all relief for financing costs is given by way of basic rate reduction. As is so often the case with tax, this is more complex than it sounds, and there can be significant restrictions on the use of this basic rate credit.
Tips
The change may push some taxpayers into higher rate tax brackets. Tips to minimise the impact of change include:
- transferring property to a lower income spouse, thus taking advantage of any basic rate band available. There are multiple factors to take into consideration here, including whether a property is mortgaged, and possible stamp duty implications
- using a company to hold new property purchases - the restriction doesn't apply to companies
- diversifying into furnished holiday lettings , to which the restriction doesn't apply.
We can help by reviewing your circumstances and advising on alternative strategies.
Changes from April 2020: property disposals
If you are disposing of property on or after 6 April 2020, there are new rules where a property has generated rental income and has also been a main residence. Lettings relief will no longer be available in such cases, unless the owner has shared occupancy with the tenant. Reduction to the final period exemption also renders the private residence rules less favourable (see front page article).
Reporting and payment of CGT is being considerably accelerated. From 6 April 2020, CGT due on disposal of residential property should be reported and paid within 30 days of completion. Please notify us as soon as possible if you dispose of residential property, unless it is wholly covered by the private residence exemption.