Landlords bear the brunt of tax changes
The last budget did little to improve the financial position of landlords with the loss of higher rate tax relief on finance charges.
Many landlords built their property portfolios, taken advantage of low interest rates and have borrowed heavily to maximise property acquisitions. In accountancy terms, they are highly geared.
For landlords that are most affected, this strategy will come back and haunt them as the tax relief for loan interest starts to reduce in the coming years. The changes are:
- From April 2017, 25% of finance charges will be disallowed and replaced with a basic rate tax credit.
- From April 2018, 50% of finance charges will be disallowed and replaced with a basic rate tax credit.
- From April 2019, 75% of finance charges will be disallowed and replaced with a basic rate tax credit.
- From April 2020, only a basic rate tax credit will apply.
For landlords who only pay basic rate (20%) Income, there is a misconception that tax on their property business will be unaffected in terms of their tax bills. The amount they pay will depend upon the amount of loan or mortgage interest payments they presently pay and claim against their tax. Take into account the following example:
Tony, who generated rents for 2016-17 of £100,000 with loan interest is £80,000. They will have taxable profits for the year of £20,000. Once the finance costs are fully disallowed, Tony’s taxable income will be £100,000 (not £20,000). Income Tax will be calculated accordingly and much will be taxed at higher rates. Tony will be able to deduct a tax credit, based on finance charges disallowed, but only at basic rate Income Tax.
If rental profits are Tony’s only income, assuming no increase or decrease in his rental income and costs, Tony’s tax bill would increase from £1,800 for 2016-17, to £11,500 by the year 2020-21.
This is a significant change for landlords who may be faced with selling properties to reduce “leverage” and restore cash flow to their tax affairs.
I your property business is similar to the above example. We can provide advise. There may be changes you could make short of outright disposal. Contact us to discuss your options.