Claiming Tax Relief On Property Investments
Section 24 means you can only claim basic rate relief ...
POSTED BY ROGER EDDOWES ON 12/11/2018 @ 9:00AM
Like most accountancy practices in the country, we are in the midst of preparing tax returns, particularly for those who claim tax relief on property investments ...
If you claim tax relief on property investments you'll notice you're now paying more tax!
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The big question that's being asked right now is why are so many having to pay more tax all of a sudden and feeling disgruntled? Well, the news was announced some time ago and is commonly known as Section 24 in the property world.
Section 24 of the Finance Act (no.2) Act 2015 means that landlords can now only claim basic rate tax relief on property investment financing!
It applies to UK landlords with residential rental properties anywhere in the world, non-UK resident landlords with UK based residential rental properties, as well as trusts and partnerships with residential rental properties.
Before the 5th April 2017, landlords were able to deduct the full amount of their mortgage/loan interest costs in their calculations of rental income before paying tax. For higher rate taxpayers this meant that they benefited from a higher rate of tax relief on property investments, but this changed as of April 2017.
"The policy now is that such costs are not considered in calculating the taxable income!"
To soften the blow, HMRC is phasing the change in over the next four years so, in the 2017/18 tax year, 75% may be claimed as before, 50% in the 2018/19 tax year and then 25% in the 2019/20 tax year. Then for the 2020/21 tax year, no interest expense may be used in the calculation of taxable rental income.
In order to obtain the 20% tax relief - which is still available - 20% of the interest may be taken off the calculated tax figure. This may seem enough for some people, but the change in the way the tax relief on property investments is given in the tax calculation may push some into higher tax brackets which in turn may affect student loan repayments, child tax credit assessments and the like.
So, if you are one to be affected, what can you do?
Increase your rental charge if the market permits
Reduce your expenses (often tricky, but we have collaborators, who can look at your utility costs and insurance costs for example)
Pay down your loans by using repayment mortgages rather than interest only
If you are married or in a civil partnership, have joint ownership. If one partner is below the higher rate threshold, apply to HMRC to have the income assessed between the two of you in the ratio of ownership, not 50:50
Make personal pension contributions to effectively expand your basic rate tax bracket
Consider transferring the properties to a limited company;, but careful advice should be taken as there are a myriad of issues to consider such as capital gains tax (CGT), stamp duty land tax (SDLT), reporting burden and associated costs
Here at Essendon, we have a group of property experts who can help you. They are a team of highly experienced accountants and tax advisors who work with property investors and developers to make sure that they pay the right amount of tax.
"Would you like to know more?"
If you'd like to learn more about tax relief on property investments now that the rules have changed, then do give me a call on 01908 774320 or click here to ping me an email and let's see how I can help you. You can also visit www.essendonpropertypartners.co.uk to find out more.
Until next time ...
If you're looking to work with a leading firm of accountants, do visit www.essendonaccounts.co.uk and let's see how we can help!
Roger trained at Edward Thomas Peirson & Sons in Market Harborough before working at Hartwell & Co, followed by Chancery, as a partner. He started Essendon Accounts and Tax with Helen Beaumont in 2014 as a general practitioner with a hands-on approach.
Roger loves ‘getting his hands dirty’, working with emerging, small-to-medium and family businesses to ensure they receive the best possible accountancy advice. Roger utilises an extensive network of business contacts to leverage the best guidance and practical solutions.