Tax restriction starts to bite landlords
If you are a buy to let landlord, you will almost certainly be aware that the restriction on tax relief for finance costs started to bite from 6 April this year.
For the current tax year, only 25% of finance costs are subject to the basic rate restriction.
For example, if your buy to let finance costs are £20,000, then £15,000 can be deducted as an expense in calculating property income. Tax relief for the other £5,000 will be given as a basic rate tax reduction of £1,000.
Is using a limited company an option?
For new buy to lets, using a limited company will bypass the restriction. However, there are other important tax issues to consider before going down this route. As for incorporating an existing property business, this might be an option if you have not owned the property for too long – otherwise the capital gains tax (CGT) cost could be excessive. And don’t forget the stamp duty land tax cost.
What other options do you have?
Another option might be to sell off some properties in order to pay off some or all of the finance on the ones you retain. Although there will be the CGT cost, you might find yourself having to do this anyway if you cannot re‐mortgage in the future because of the tighter lending restrictions that now apply. Replacing buy to let finance with a mortgage on your own home is also a possibility given that residential mortgage rates are generally much lower. The interest should still qualify for tax relief.
To discuss your property tax planning in more detail, please talk to us.
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