Landlords pushed into a tight spot!

25 August 2015

Gary Heynes

Landlords were dealt a blow in the Budget with the announcement of a restriction to basic rate relief only on finance costs on rental properties. So what should these landlords do now?

The potential hit to landlords, announced in the Summer Budget has made much of the tax news. The Government estimates that when fully implemented, the restriction to basic rate relief on finance costs will raise at least an extra £665m per year. A further hit will come in the form of the replacement of the wear and tear allowance for furnished lettings. 

That’s a lot of money, but bear in mind that HMRC’s own figures say that only 20 per cent of landlords will be affected. The other 80 per cent presumably only pay tax at the basic rate (and will therefore have no restriction to their liability) or have no borrowings so are unaffected.

The 20 per cent affected must therefore have borrowings and pay tax at 40 per cent or more. The options for them are limited but they should consider:

  • Whether it is now worthwhile reducing financing costs. For some it may have made sense to invest cash and borrow for property rental, but with the changes meaning an extra 20 per cent or 25 per cent (and in some cases 40 per cent) tax on the amount of the finance costs, it may now be better to repay borrowing rather than keep cash invested.

  • Ownership of the property. If held in a sole name, it may be better to transfer to a spouse or civil partner either entirely or partly. While this should be free of capital gains and inheritance tax, a Stamp Duty Land Tax liability could still arise. It may even be worth considering transferring in whole or in part to adult children – again, there may other taxes due in doing so, but the income tax and future inheritance tax savings may make it worthwhile.

  • For some landlords it may be worth considering transferring their activities to a company. For landlords with many properties, they could qualify for incorporation relief which could significantly reduce any tax cost of transferring their property business. Companies only pay tax at 20 per cent (and this rate should be reducing in the future), so the impact of finance cost restrictions will be greatly limited.

Should any action be taken now? Probably not immediately. There is some way to go before the new rules are enacted and a change to the announcement is always possible once the impact on the market becomes clearer and lobbying is listened to, but there is no harm in getting the options clear - just in case!