Let properties
For periods from 6 April 2020, individual landlords of residential properties have been unable to deduct interest or finance costs from their rental income for tax purposes. In place of the blocked interest the landlord receives a 20% tax credit to set against their Income Tax bill. This restriction of interest deductions doesn’t apply to corporate landlords or to individuals letting out qualifying furnished holiday lets.
Where the property business is supported by borrowing, the increased taxable income caused by the restrictions on interest deductions 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 2019/20 (when they could deduct 25% of the £32,000 interest paid) with their position in 2020/21, when all the interest is blocked. The figures will be different for Scottish taxpayers, who pay tax on property income at slightly different rates, but the principles are the same.
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:
| 2019/20 | 2020/21 | |
| Salary | £35,000 | £35,000 |
| Rents less running costs | 34,000 | 34,000 |
| Interest deduction | (8,000) | nil |
| Total net income | 61,000 | 69,000 |
| Personal Allowance | (12,500) | (12,500) |
| Taxable income | 48,500 | 56,500 |
| Tax charged at 20% | 7,500 | 7,500 |
| Tax charged at 40% | 4,400 | 7,600 |
| Tax credit on disallowed interest at 20% | (4,800) | (6,400) |
| Total tax payable | 7,100 | 8,700 |
- selling one or more residential properties to reduce your borrowings
- selling all residential property and reinvesting in commercial buildings, where the interest restrictions don’t apply
- letting homes as Furnished Holiday Lettings
- 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! |
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| Review your borrowings to ensure a sustainable future for your lettings business. |