Mortgage Interest Deductions
In his Summer budget George Osborne announced that landlords will only be able to offset mortgage interest at the basic rate of tax 20% by 2020. This will be phased in from April 2017 but will not apply if a property meets all the criteria of a furnished holiday letting.
Landlords pay income tax on their rental profit after deducting normal costs including mortgage interest then pay tax at either basic rate or higher rate depending on their circumstances.
From 2017/18 landlords will no longer be able to deduct all of their finance costs i.e. mortgage interest from the property income to arrive at their taxable income.
Basically the following finance costs can be deducted as follows:
• 2017/18 – only 75%
• 2018/19 – 50%
• 2019/20 – 25%
• 2020/21 – Nil
However landlords will be allowed to make a claim for basic rate deduction for the tax credit as follows:
• 2017/18 – 25%
• 2018/19 – 50%
• 2019/20 – 75%
• 2020/21 – 100%
This means that if you are just a basic rate tax payer you will not suffer any further tax but if you are a higher rate tax payer then your tax bill will increase over the next few years.
As companies continue to benefit from full relief it might be possible for landlords to consider transferring properties into Limited Companies. Whilst corporation tax is due to fall to 19% in 2017 and 18% in 2020, when investing through a company income can be paid out to shareholders as a dividend.
For a property to qualify as furnished holiday letting the following basic criteria tests apply:
1. The availability condition during the period (normally the tax year) accommodation is available for commercial letting as a holiday accommodation to the public must be at least 210 days.
2. The letting condition during the period the accommodation is commercially let as a holiday accommodation to the public must be at 105 days.
3. Pattern of occupation condition. Accommodation must not be let for periods of longer term occupation of more than 155 days during the year.
Furnished holiday lettings do have other advantages over other normal buy to let lettings in that they are treated as trades for tax purposes. They can be entitled to plant and machinery, furniture and furnishings, capital allowance with capital gains tax reliefs of either business asset rollover or entrepreneur’s relief. Profits count as earnings for pension planning purposes.
If you require further information on the new rules for buy to let properties and further information on the furnished holiday lettings please do not hesitate to contact us.