Claiming Loan Interest Relief
Keeping accurate records could save you tax ...
POSTED BY HELEN BEAUMONT ON 20/07/2018 @ 8:00AM
A meeting with a potential new client this week has prompted me to write this blog post and remind us all how keeping accurate records could save you tax ...
If you keep accurate records, you can save tax when claiming loan interest relief!
copyright: yuliang11 / 123rf stock photo (licensee)
Over the last 10 years, this client had built a portfolio of properties, both buy-to-let and serviced accommodation, in their own name and more recently via a limited company. With the introduction of the loan interest relief restriction from April 2017, this is not uncommon.
"Like many others, over those 10 years, she had re-mortgaged existing properties!"
This has allowed her to acquire further properties, with the mortgages taken on one property in part relating to the acquisition of another. There is no problem with this, however with the changes to the way in which loan interest relief is claimed on buy-to-let properties it is imperative that accurate records are kept.
This is because there are different loan interest relief rules that apply to buy-to-let properties, furnished holiday lets (serviced accommodation) and borrowing funds to lend to a limited company, including an investment company.
These are summarised below:
Buy to let properties
As I am sure you are aware, since April 2017, the system of calculating tax liabilities on rental income has changed, and by April 2020, a buy-to-let landlord won't be able to deduct all their costs of finance from rental income to reduce their tax bill.
Instead, landlords will be given a completely new tax credit, which is less generous than the current regime, set at a maximum of 20% of the finance costs, but the reality could be a lot less than this.
Furnished holidays letting/serviced accommodation
Compare the position above to that of serviced accommodation that satisfies the furnished holiday letting rules. In this case, the tax rules are a lot more favourable and loan interest relief continues to be allowed in full.
Where properties move between the two different regimes, the loan interest relief will be required to be apportioned on a just and reasonable basis.
Borrowing to acquire shares or lend to a close company
With many moving to acquire buy-to-let properties through a limited company, they may decide to leverage their existing portfolio and lend that money to the new limited company.
If this is the case, in simple terms, as long as the company is 'close', i.e. it is controlled by five or fewer shareholders and the investor owns more than 5% of the shares in the company, loan interest relief will be allowable in full against the investors' general income. This is known as 'qualifying loan interest'.
With the tax regimes on serviced accommodation and qualifying loan interest being a lot more favourable, you can see that where you are borrowing against buy-to-let properties (or even your main residence) to invest in either of these, keeping good records is going to save you tax.
"Would you like to know more?"
If you'd like to find out more about loan interest relief then do give me a call on 01908 774323 or click here to ping me an email and let's see how I can help you.
Until next time ...
If you're looking to work with an expert tax advisor with a wide range of tax experience, do visit www.essendontax.co.uk to find out more about me and discover how I can help!
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen’s specialist knowledge in tax planning and experience ensures every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.