In our article on 3 October 2017, we discussed how changes to income tax relief on residential property would affect landlords, their tenants and the housing market generally. The recent rise in interest rates can only mean more pain.
Individuals who own property personally and let it out will have already noticed the impact of these changes. As a reminder, for 2017/18 25 per cent of interest costs will only get tax relief at the basic rate of 20 per cent instead of at the higher or top rate of tax as in previous years. By 2020/21 tax relief on all interest costs will only be available at the basic rate .
We previously estimated that someone renting out a £600,000 property with a net yield before interest and tax of around £17,700 per annum, an interest only mortgage at 60 per cent loan-to-value and 4 per cent interest rate would see a £3,600 increase in their annual tax bill from £1,485 to £5,085 as a result of these changes . Such an increase would leave them in a position where they would be making an overall after tax loss of £1,785 on their property rental as a result of the restriction of tax relief .
If we factor the recent interest rate rise into the equation, the same landlord is likely to find that by 2020/21 his previously commercially viable property letting business could become even more of a financial headache. Using the same figures as above, and assuming the lender passes on the 0.25 per cent increase, that same landlord will be paying around £15,300 in interest ; an increase of around £900 for the year. On top of this the tax bill will increase by £1,900; from around £3,000 in 2018/19 to around £4,900 in 2020/21 . That works out at a £2,520 per annum, or over 14 per cent of the net pre interest and tax income from the property rental .
The combined effect of the interest relief restrictions and interest rate rises will only make matters worse for the property market.
Landlords will now be looking at their options and taking actions to protect their investments as much as possible. Rent increases and a drop in property prices have been widely predicted.
With corporate landlords not being affected by the interest relief restrictions, will we now see a rush to incorporate existing unincorporated residential property businesses in order take advantage of the more favourable corporate property tax regime?
For more information, please comment below or get in touch with Jackie Hall.