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Restriction on interest relief for Buy to Let Investors

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RESTRICTION ON INTEREST RELIEF for Buy to Let Investors is something we are taking very seriously at Brothertons. Even though the changes are being introduced over a 4 year period (2017-18 to 2020-21) so effectively over the next 5 years we are advising clients to consider this straight away and look at their situation in detail to ensure they are set up in the most appropriate way.

We are finding as this is so new, many people are just unaware of what an impact this will have on them potentially. We are keen to talk to clients and non clients so please call for a chat if you are concerned this may impact on you.

As an example on how this will impact differing situations I have created two examples below which will hopefully give some idea on how this will affect certain situations from 2020-21 compared to the current situation.

EXAMPLE 1

Bill is a Manager earning £45000.00 per annum, so he is a 40% tax payer. He has purchased a buy to let property as an investment. The outstanding debt is relatively small but does exist and interest on this loan is £2500.00 per annum. His repairs and other costs are £1000.00 for the year.

 2016 - 172020 - 21
Gross Rents7200.007200.00
Repairs and other costs(1000.00)(1000.00)
Net Rental Profit3700.006200.00
TAX at 40%1480.002480.00
Tax Reducer at 20% on Interest0.00(500.00)
Liability on Rental Income1480.001980.00
Tax increase500.00

EXAMPLE 2

Karen and Phil are married and run a rental property business. This is run through a partnership. They have many properties and are highly geared. This has never bothered them as they are happy to hold the properties as potential investments and as long as they are covering their costs and making a small amount they are happy. This was their strategy from day one. Sound familiar?

 2016 - 172020 - 21
Gross Rents600,000.00600,000.00
Repairs and other costs(200,000.00)(200,000.00)
Interest on Mortgage(350,000.00)
Net Rental Profit50,000.00400,00.00
Personal Allowance X2(22,000.00)
Taxable Income28,000.00400,000.00
Tax at 20% (Two Tax Payers)5,600.0017,200
Tax at 40%0.0085,600.00
Tax at 45%0.0045,000.00
Less interest relief on 350,000(70,000.00)
Net tax liability from Rental Income5,60077,800.00
Effective rate on 'real' rental profit11.20%144.4%

From these examples it can hopefully be seen how this will impact on most situations , even individuals with only one property. (subject to loans and income levels)

Other scenarios are just not sustainable as can be seen above and we are looking at differing strategies to help in these scenarios.

Initially I would suggest open discussion just to clarify your own personal situation moving forward then a proactive look at options for moving forward.

Please call to discuss your situation on 01527 68235 or email john@brothertonaccountants.co.uk