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Individual landlords of residential properties are subject to two new tax rules from 6 April 2017: a restriction on deducting interest costs, and the ‘cash basis’ for accounts where the property business has a turnover of no more than £150,000.

The cash basis has the effect of taxing income in the year it is received and expenses in the year they are paid. It may benefit you if your tenants tend to pay late. You can opt out of the cash basis if you wish.

In 2017/18 individual landlords are permitted to deduct 75% of their interest and finance charges for tax purposes, and from 6 April 2020 all such finance costs will be disallowed. In place of the blocked interest the landlord receives a 20% tax credit to set against his income tax bill. This adjustment to interest deductions doesn’t apply to corporate landlords.

Where the property business is supported by borrowing, the increased taxable income can push the landlord’s total income into higher tax bands, leading to the loss of personal allowances or the claw-back of child benefit.

The example compares a landlord's tax position in 2017/18 (when he deducts 75% of the £32,000 interest paid) with his position in 2020/21 when all interest is blocked. The amounts of personal allowance (£12,500) and basic rate band (£37,500) are estimated for the later year.

2017/18 2020/21

Salary £35,000 £35,000

Rents less running costs 34,000 34,000

Interest deduction (24,000) nil

Total net income 45,000 69,000

Personal allowance (11,500) (12,500)

Taxable income 33,500 56,500

Tax at 20% 6,700 7,500

Tax at 40% - 7,600

Tax credit on interest at 20% - (6,400)

Total tax payable 6,700 8,700

If your residential property business is supported by significant borrowings you need to urgently consider whether to restructure that business to avoid significantly higher tax bills. Your choices may include:

• Selling one or more residential properties to reduce borrowings
• Selling all residential property and reinvest in commercial buildings (the interest restrictions don’t apply)
• Let the homes commercially as Furnished Holiday Lettings (which are not affected)
• Transferring the properties into a company

The last option is not easy as the lender will have to agree to transfer your property loans to the company. The transfer of properties is likely to incur land tax charges for the company, and may well generate a taxable capital gain in your hands.

We can help you model the financial future for your residential property lettings.

Action Point!

Review your borrowings to ensure a sustainable future for your lettings business.

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Clarke Nicklin House, Brooks Drive, Cheadle Royal Business Park, Cheadle, Cheshire, SK8 3TD. Registered Number OC309225.
The firm is registered to carry on audit work in the UK & Ireland. Details about our audit registration can be viewed at www.auditregister.org.uk under reference number C001178544. The professional rules applicable are the Audit Regulations and Guidance which can be found at www.icaew.com/regulations, and the International Standards on Auditing (UK and Ireland) which can be found at www.frc.org.uk/apb/publications/isa.cfm.