Property business owners, particularly buy-to-let landlords, have been hit with a number of quite dramatic changes in their tax status. One of the most draconian is the gradual disallowance of tax relief for finance payments that starts April 2017.
We have highlighted this issue in past articles posted to this newsletter. In essence, from April 2017, finance charges will be progressively disallowed and replaced with a tax credit fixed at 20% of the cumulative charges disallowed.
The changes will have the most impact on landlords who have borrowed heavily to grow their property portfolio. Landlords affected will suffer a possible two-fold, and negative impact on their property business.
Firstly, if their present claims for mortgage interest and other finance charges are reducing the amount of higher rate tax they are required to pay, once the present changes are fully implemented by 2020, tax bills will increase as tax relief will be limited to the basic rate.
Secondly, if their present claims for mortgage interest and other finance charges are reducing their taxable property income, such that they pay no higher rate tax, when these charges are disallowed their taxable income will increase - possibly into the higher rate bands - and for the first time they may become higher rate tax payers. They will still get some relief for finance charges paid but only at the basic rate.
In both cases, the amount of cash generated, after tax, will reduce. If landlord’s occupancy rates fall, the loss of cash flow will be exaggerated by increased tax bills and investors may face tough choices.
Planning is absolutely key. If you feel you may be affected, and have not taken professional advice thus far, please call. We would be delighted to both quantify the effects on your property business cash flow and to offer strategic ideas to minimise the downside consequences.