Tax relief on interest – landlords

The attractions of buying a property for rental have suddenly reduced in the budget. From 6 April 2016 the current tax relief of 10% of the rent received to cover renewal of furniture is to be abolished. So landlords can only claim for money actually spent on furniture. Since most spent less than 10% of rent – then this is a worse position.

The position is worse still for higher rate taxpayers Until now landlords were liable to tax only on the profit that they made – i.e. the rent received less running costs and less the interest paid on any loan to acquire. This is the same rule that would apply to any business. However the interest relief is now to be capped at basic rate.

So for a person who is not liable to tax at higher rates there will be no difference – meaning that it continues to be a good option for example for families with one high and one low earner. Electing to treat the jointly owned property as being largely owned by the low earner is still tax efficient.

However for a property owned by a higher rate taxpayer the numbers are different. A property worth £500,000 yielding rent after expenses (after deducting the 10%) of (say) £20,000 could be acquired with a mortgage of (say) £400,000 at interest rate of 5% and deposit of £100,000. There is no profit since the interest is £20,000 and the capital payments on the mortgage are a form of savings plan. However from 2020 there will be a tax liability of £4,000 – and this will be phased in gradually.

Owners of multiple properties are already considering whether they should own their rental properties through a limited company. If you are about to embark on developing a property empire then this is certainly something you should consider if you are going to be highly geared.