Should you still invest in bricks and mortar?

Published by on 8 April 2020

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Personally owned residential properties – the end of the higher rate tax relief on interest.

Recent events have shown how dramatically circumstances can change over a short period. As well as the significant impact on society as a whole, on a personal level many of us may be considering how strong our financial circumstances are and whether we will be able to cope, not just during this difficult time, but also if events happen in the future. The recent falls on the stock markets around the world are of course a concern to many.

If property is still your preferred investment choice, or one of them, it is important to keep up to date with changes to the tax rules. If you are relying on rental income to provide you with a steady income stream, which in these uncertain times may be an issue, you obviously need to bear in mind the amount of income tax that will be due on that income in due course. Those who have held residential buy-to-let properties for a number of years may have realised that the amount of tax relief they can claim on mortgage interest has gradually reduced over recent years, and may have noticed a gradual increase in their self assessment tax liabilities. Hopefully by the time that income tax is payable on rent due now some normality will have resumed, or there will be some special measures in place.

Tax relief was available at a taxpayer’s highest rate of tax, however it has been gradually phased out over a three year period and from 6 April 2020 relief is limited to the basic rate of tax, which is currently 20%. For some this may have significantly reduced the amount of tax relief they receive, however the positive is that at least some relief may still be available! In some situations, the relief will be less than 20%. The amount that can be claimed is restricted to rental profits at 20%, and therefore if the rental profits are lower than the interest charge for a particular tax year the relief will be restricted. If there are significant borrowings and the interest outweighs the rental profits (rental income less other expenses), some interest may not be relieved in the tax year the interest is paid. If there is a rental loss, no relief will be available at all for that year. Any interest that has not been relieved in one tax year can be carried forward to the next.

The restriction does not apply to commercial properties, furnished holiday lettings, or residential property held in a company. It might be that owning a residential property through a company is a better structure for you, although there is a whole host of matters to consider, including whether you are in it for the short or long term. Considering tax before you buy a property is the key to securing the best outcome for your personal circumstances.

For further information please speak with your usual Kreston Reeves adviser here, or contact Jamie Hopkins here or on +44 (0)330 124 1399.

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