Loss of interest relief on let properties

With effect from 6 April 2017 interest relief will be restricted so that by the year commencing 6 April 2020 there will only be basic rate relief for interest paid on a mortgage to acquire a property for letting. This will also apply to the incidental costs of acquiring loan finance such as a broker’s fee.

The relief under the new rules is to be given by way of a relief for the interest at 20% rather than a reduction of the actual profits.

In the transitional years some relief will be given the old way and some the new, reducing from 75% to 0%.

So for the year ending 5 April 2017 if you have interest costs of £10,000, £7,500 will be deducted from your rental income and £2,500 @ 20% will be allowed as a deduction.

Individuals who currently only pay basic rate tax on their property income might find themselves with an increased tax bill. For example under current rules income of £50,000 and interest of £10,000 will give rise to profits of £40,000 less personal allowance of £10,600 making £29,400 taxable @ 20% = £5,880. With the new rules fully applied the position would be profits of £50,000 less personal allowance of £10,600 = £39,400. £31,785 @ 20% + £7,615 @ 40% = £9,403 less £10,000 @ 20% = £7,403.

These new rules do not apply to companies so operating through a limited company might become more attractive but there are many other factors to take into consideration. Take advice!

If losses are made it becomes even more complicated.