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From April 2017, landlords have had to digest the impact of George Osborne’s landlord tax changes.  It’s a hot topic for many which will result in more tax being paid, so here’s a recap and a few ideas on how to keep your tax bill down.

Recap

Previously, individual landlords could offset 100% of finance interest on loans (most commonly mortgage interest) against their rental income. So if you’re an additional rate tax payer paying 45% income tax, as a landlord you’d receive tax relief at 45% on your finance costs.

From 6 April 2017, this relief is being gradually restricted and instead, a flat rate relief of 20% of your interest is being phased in. Over the next few years, you’ll be in a transition period where you’ll receive a proportion of tax relief on the old basis, and some on the new.

If you’re a highly geared investor with significant borrowings against your property portfolio, these measures will have the greatest impact on you and will increase your tax liability significantly.  For example:

A higher rate taxpayer has an annual rental income of £50,000 per year, and pays £20,000 a year in mortgage interest:

In 2016/17 the tax payable is £13,500 ((£50,000-£20,000) x 45%).

In 2020/21 the tax payable is £18,500 ((£50,000 x 45%) – (£20,000 x 20%)).

This is a 37% increase in tax on the same income!

A few ideas

First of all, we need to work out how much extra tax this is going to cost you, and then it might be worth:

Introducing other business partners

If you owned your property business with others, this would dilute the level of profit attributable to you personally and reduce your tax liability.  It may be beneficial to gift or sell some of your properties to other basic rate tax payers

Holding your properties in a company

Only individual landlords are caught by the new measures, so if the properties were held in a company, the finance restrictions wouldn’t apply.

The restrictions don’t apply to furnished holiday lettings either.

As ever, please talk to us before making any changes because everyone’s circumstances are different.


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