Back in July 2015 the then Chancellor, George Osborne, announced a change to the way that tax relief for finance charges, in particular loan and mortgage interest, would be given against residential property rents. Rather than reducing the net profit of the residential property business, any tax due would be reduced by giving a credit of 20% of the finance costs.
However, the change was introduced over several years, and it is only now that the full effect is being seen in the tax liabilities of landlords. Despite much publicity over the last 5 years, the change is still catching a few landlords out.
The best way to explain what is happening is through an example. Let’s say that you have net rents of £30,000 before taking into account mortgage interest:
In this example, a higher rate taxpayer is paying an extra £1,000 in tax due to the change of the rules.
If this person was a basic rate taxpayer, then the bottom line is £5,000 under both the old and new rules; however, the new rules may have a negative impact, even on basic rate taxpayers, as they mean your total income is higher than it used to be. (In this example your income is now £30,000 rather than £25,000.)
This may impact any claim for Child Benefit or some other benefits, as well as the utilisation of personal allowances, or payments for child maintenance, etc.
There may be ways to minimise the effect of this rule so get in touch if you want to chat things through.