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Individual landlords of residential properties are subject to restrictions on how much interest and finance costs they can deduct from rental income.

In 2018/19 individual landlords are permitted to deduct just 50% of their interest and finance charges for tax purposes. From 6 April 2019 it reduces to just 25% 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 restriction of 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 allowances or the clawback of Child Benefit.

The example below compares an English landlord’s tax position in 2018/19 (when he deducts 50% of the £32,000 interest paid) with his position in 2020/21, when all his interest is blocked. The amounts of Personal Allowance (£12,500) and basic rate band (£37,500) are estimated for the later year. The figures will be different for Scottish taxpayers, who pay tax on property income at different rates.

graph 1

If your residential property business is supported by large 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 as Furnished Holiday Lettings (which are not affected, but require detailed conditions to be met)

• 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.

Since April 2017 individual landlords with turnover of no more than £150,000 should use the ‘cash basis’ to draw up their accounts. This 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.

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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