Restricting finance cost relief for landlords

Articles 06.10.2015 Author: Robert Maas

The amount of income tax relief landlords can get on residential property finance costs (such as mortgage interest) will be restricted to the 20% basic rate of tax. This will ensure that landlords with higher incomes no longer receive the most generous tax treatment. To give landlords time to adjust this charge will be phased in as follows:

– 2017/18 full relief for 75% of interest (35% effective rate of relief)

– 2018/19 full relief for 50% of interest (30% effective rate of relief)

– 2019/20 full relief for 25% of interest (25% effective rate of relief)

The balance of the interest and other finance costs will attract relief at the basic rate of tax.

The rapid increase in buy-to-let investments has undoubtedly significantly aggravated the problem of young people getting on the housing ladder. With no tax relief for home mortgage interest, a first-time buyer cannot hope to compete with a landlord, 40% or 45% of whose interest costs is subsidised by the taxpayer.

Accordingly curbing the growth of buy-to-let is not unreasonable. It needs to be realised however that this restriction applies to all residential property investment. It will hit the non-resident investing in UK residential property as well as buy-to-let landlords.

In practice, the restriction will not apply to investment by companies, as the rate of corporation tax will be less than the basic rate of income tax. This raises the question whether it is sensible to use a company in future for residential property investment. The answer is not easy. If you are investing for income, it may make sense. Bear in mind though that if you need the income to live on you will have to pay the dividend tax (see below) in addition to corporation tax to get the funds into your own hands. This does not make sense for most people. For a 40% taxpayer, corporation tax plus dividend tax comes to 45.325%, so you will be worse off using a company. (This figure ignores the exemption for the first £5,000 of dividends). If you are more interested in capital growth, it is generally not sensible to hold appreciating assets through a company as this creates two levels of tax on capital gains.

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About the Author

Robert Maas

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