Landlords! Are you claiming the correct loan interest relief?
This article is the sixth in a series in which we focus on property issues in our bi-monthly e-newsletter for individuals and their families, Pathfinder - personal tax and wealth (sign up here). This section of the e-newsletter will further explore the most common property tax issues our clients are asking us about. Whether a landlord, or simply someone looking to utilise property as an investment for their (and their family's) future, this series will seek to advise you on your options, and prevent you from falling foul of any unforeseen tax implications!
In this article we look at some of the tax relief available to landlords...
Residential buy to let owners who pay higher or additional rates of tax will have already noticed the first stage of the gradual removal of higher rate relief on mortgage interest, which first impacted tax liabilities for the 2017/18 tax year. Once we reach 2020/21, relief will only be available at 20%. Despite this, it is worthwhile landlords considering whether they are maximising the amount of relief they are claiming, as even at just 20% it is still valuable.
Borrowing normally happens at the point of purchasing a property. However, it is often common to re-mortgage properties and the equity used to repay the initial capital introduced. Does this mean the interest is allowable?
HMRC’s guidance states that relief will be available provided the additional borrowing is to provide working capital for the business. However, relief will not be available on the amount that exceeds your actual capital investment in the business, so your capital account within the property business accounts should not become overdrawn.
The best way to illustrate how this may work is with a few examples.
Typically, a property will be acquired with a deposit and a mortgage. If later (borrowing restrictions permitting) the deposit is withdrawn by way of further borrowings, interest relief (restricted based upon the rates for the tax year in question) will be due on the amount withdrawn.
Example 1: A newly married couple, who previously lived in their own separate houses, decide to make the husband’s house their joint home and the wife lets her house. Once this letting starts, a new property business commences. Any excess of the value of the property at that time, over any amount outstanding on a mortgage on the same date, can be withdrawn by further borrowings on which interest relief can be claimed.
Example 2: In a world of internationally mobile employees, it is very common for someone to retain their family home and let it whilst outside the UK. Once this letting starts, the property is introduced into a letting business at its then market value net of any mortgage. Again, the amount introduced can be withdrawn by borrowing. The amount loaned may then for example be used to purchase a property abroad.
Look out for the next property focussed article in August’s edition of Pathfinder – Personal tax and wealth update. To sign up to receive this complimentary bi-monthly newsletter, and other Kreston Reeves publications/event invitations, please click here. There is also the option to subscribe to receive our exclusive ‘property and construction’ sector updates, events and webinars for those with particular interest in this sector.