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Residential mortgage interest relief - news article image

Residential mortgage interest relief

30 Aug 2019

2 minute read

On the 9 July, David Rickwood, Personal Tax Director for Shaw Gibbs posted the top 10 tax considerations residential landlords need to take into account.

Following is my answer to David’s third point - Do you know how to maximise your residential mortgage interest relief, which is currently being restricted? 

Interest relief restrictions so far have had a significant impact on landlords who are higher rate taxpayers and those who were not but became so as a result of the new rules.

By 2020/21 interest will only be allowable as a 20% tax credit and many landlords will record progressively lower after tax income.

What can a landlord can do to reduce the impact of the above tax change? Here are some ideas.

Accelerating finance costs

For an additional rate taxpayer using the cash basis in 2019/20 the effective rate of tax relief on mortgage interest and associated costs will be 26.25% and therefore is it worth re-mortgaging now and claiming relief for loan arrangement fees sooner rather than later?

Making pension contributions

Landlords can reduce the impact of the tax increase by increasing their pension contributions. As a general rule, to claw back the extra tax you pay, the gross pension contribution will have to be half as big as your non - deductible interest. Although you can completely reverse the tax increase by making pension contributions, cash flow, relevant earnings, annual allowance and the lifetime allowance need to be considered.  

Paying off mortgages or selling

It is also worth calculating the real cost of buy-to-let interest if repayment is an option.

Landlords with a heavily mortgaged property portfolio who end up making rental losses as a result of the restriction might consider selling some properties to reduce their lending and therefore reduce their higher net of tax relief mortgage interest cost. Various factors will also need to be taken into account such as interest rates, capital appreciation etc.

Investing in commercial property or converting residential properties to either commercial use or to furnished holiday lets should be considered where possible, as well as arranging borrowings so that more of them relate to non-residential property as the interest relief restriction does not apply to that type of property investment.

Transferring to spouse or company

An inter-spouse transfer should be considered in cases where the transferor is a higher rate taxpayer and the transferee is, and remains, a basic rate payer after transfer. Additional tax can be saved in cases where child benefit is clawed back or where personal allowance is abated. Stamp Duty Land Tax and mortgage issues must be considered on such transfers where the transferee takes on part of the mortgage debt.

Transferring an existing property business into a company has Stamp Duty Land Tax implications and the higher rate of charge applies to every property acquired by the company. Where a transfer or six properties or more takes place, an election can be made by the company to use the non-residential SDLT rates.

Residential mortgage interest relief - news article image


Emily Hillier

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