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January 1st 2019

Buy to let mortgage interest relief restriction

Since April 2017, the amount of higher rate tax relief available to buy to let landlords for finance costs has been restricted.

The change is being phased in over three years, with progressively greater restrictions each year. From 6 April 2019, 75% of finance costs (which include not only mortgage interest but also things like arrangement fees) will be excluded from the calculation of rental profits, and taxpayers will get a flat rate deduction against the tax bill of no more than 20% of those costs.

As has been commented on before, one of the consequences of the way the restrictions work is to push many landlords from the basic rate into the higher rate tax bracket. There may also be knock-on effects in other areas such as the High Income Child Benefit Charge, and the rate of Capital Gains Tax charged on any taxable gains (as this is dependent on the individual's total taxable income).

With the restriction stepping up to 75% for 2019/20, even more landlords are likely to be affected in the coming year. The interest relief restrictions do not apply to companies so for some, it may be worth considering incorporating the letting activities, though this must be planned with great care and a sound understanding of the tax implications.

Incorporation may give rise to CGT and LBTT or SDLT charges and consideration must also be given to a range of other factors such as how best to extract rental profts from the company and what happens in the long term, for example if the properties are to be sold and the company wound up. The administrative aspects of running a company must also be borne in mind.

For those considering using a limited company structure for current (or indeed future) buy to let activities, it is also important to appreciate that, relative to the personal buy to let mortgage market, the limited company mortgage market is relatively immature, so there are comparatively few products around and the interest rates tend to be appreciably higher. The impact of higher rates needs to be factored in at the planning stage.

If you'd like to discuss the tax aspects of your buy to let activities, contact us today.

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