Landlords today face an increasingly complex landscape of accountancy and tax issues, making it essential to have a knowledgeable and experienced landlord accountant by your side. In recent years, property values and rental income have shown steady growth, often accompanied by attractive tax relief on financing costs. However, recent changes to the tax system are prompting property investors to reevaluate their strategies to avoid costly mistakes in the future.

Understanding the Impact of New Tax Relief Rules on Your Rental Income

As of April 6, 2017, individuals can only deduct 75% of their borrowing costs, including interest, incurred in running their lettings business. This percentage will increase by 25% each year until April 6, 2020, when all interest paid by individual landlords will be disallowed. Instead, they will receive a tax credit equivalent to 20% of the disallowed interest to offset against their income tax liability.

Highly geared investors may find themselves paying tax on non-existent profits, but there are strategies to mitigate this issue. For married couples and those in civil partnerships, joint ownership can be considered, especially if one owner is not fully utilizing their personal allowance and basic rate income tax band.

For those already affected, acquiring additional properties might be more tax-efficient if done through a company. Notably, the interest relief restrictions do not apply to furnished holiday lettings, making this option appealing to some property investors. To qualify, properties must be available for letting for at least 210 days and actually let for 105 days but no more than 31 days to the same occupants in a tax year.

Additionally, it may be possible to rearrange borrowings, particularly if the owners are involved in other businesses that have borrowings.

How Will This Affect You if You Own the Property Through a Company?

The restriction on the deductibility of finance costs does not apply to corporate landlords. A company can continue to deduct all the interest and finance costs when calculating the taxable profits of its property investment business. However, companies may face higher interest rates or more difficulty securing mortgages on their rental properties. Lenders might require directors to provide personal guarantees before advancing loans to the company.

Investing in property through a limited company can have advantages, depending on your long-term goals:

• Tax on Disposal: Companies pay corporation tax, which is lower than the higher rate of personal capital gains tax.

• Roll-Up of Profits: Profits from the property can be retained by the company (after corporation tax) until extraction at a later date, such as retirement.

• Disposal as an Active Property Rental Business: The company can be sold as an active business, subject to corporation tax, which is more favorable than individual capital gains tax.

• Succession Planning: Shares in the company can be passed on more easily than shares in a privately held investment property.

If you want to navigate the evolving tax landscape and maximize your benefits, having a landlord accountant like JK Accountants is worth considering.