The loss of tax interest relief – what are the options for landlords?

We are now five months into the first year of the new restrictions on tax relief which individual landlords receive from their properties.

For those who are not landlords, and wonder what all the fuss is about, let us explain.

The government has decided that landlords will have the tax relief they claim on the expenses incurred running their property portfolios reduced. These are expenses such as mortgage interest, interest on loans taken out to furnish properties, and any other fees and costs incurred.

The restrictions are being applied in stages, the first stage began in April 2017, and the changes will continue until 2021, when all costs incurred will receive the basic tax relief.

Obviously, this measure has not been welcomed by landlords, as many of them will see a reduction in their income. However, there are several options those affected can take to protect their income, and we have explored the pros and cons of some of these options.

Sell the low-performing properties

Running a property business is like any other business. If one part of the enterprise is not making a profit, then it should be dropped or discarded. If one or more of the properties in a portfolio are making a very small profit after deductions, then it may be worth considering selling them.

Transfer some property to a spouse

If a landlord has a spouse who has any unused tax allowances or is in the basic tax band, it may be worth transferring some of the properties to them. People paying the basic rate of tax are not affected by the restrictions on deductions. However, care must be taken that transferring some assets does not push the spouse into a higher tax band.

Form a limited company

Transferring a portfolio into a limited company is another option open to landlords. It is true that some landlords could benefit from doing this. But there are disadvantages to this option. When property is transferred to a company it will be considered a disposal asset at market value for tax purposes, so Capital Gains Tax (CGT) comes into the picture.

HMRC will allow incorporation relief for a trading business. However, the tax authorities do not consider property rental a ‘true’ business, so that avenue remains closed to landlords and capital gains tax will be due. But some landlords will still think the limited company option worth considering, even though CGT will need to be paid when transferring the property – and paid again if they choose to sell the company in future.

Accept the restrictions

There is the option of biting the bullet and accepting the restrictions and loss of income. This option could well be the best for a landlord receiving a modest income from a small property portfolio.

However, landlords with a large portfolio (four or more properties, let’s say) may think it worth taking advantage of the various options open to them.

There are advantages and disadvantages in the options open to landlords who wish to reduce their tax liability. Some of the options, such as forming a limited company, will appeal to those with large portfolios, whereas landlords with smaller property portfolios will be tempted by the other options.

As mentioned, this is the first year of the restrictions on tax relief, and the restrictions are going to get harder as the year 2021 approaches.

If you are a landlord and are still unsure of the right steps you should take to ease your tax burden, why not get expert advice from us? We will advise you on the best option you should take regarding these tax restrictions on your property business. Call us today.