From 2017/18 individual landlords won’t be able to deduct all of the finance charges they incur in their residential lettings business, for tax purposes. We set out the effect of this change in our newsletter on 3 September 2015.
The blocking of interest deductions will mean that landlords with outstanding mortgages will be taxed on their gross income before interest charges. By 2020/21 when 100% of the interest will be blocked as a tax deduction, the landlord’s marginal tax rate may increase to 40% or 45%, and some landlords will make a loss after tax.
One solution is to spread the property income over two people by giving a share in the let property to the landlord’s spouse or civil partner. Such a gift won’t attract CGT if the couple are living together during the year of the gift. Having two owners allows two basic rate bands, and two personal allowances, to be set against the income instead of one.
Where a let property is already jointly held as tenants in common, the couple can choose how to share the income. Married couples are taxed on income from jointly held assets in the ratio 50:50, unless an election on form 17 has been submitted to HMRC requesting that income should be assessed to reflect the individuals’ beneficial interests in the property.
Only property owned as “tenants in common” can be held in ratios other than 50:50, where the property is owned as joint tenants it is deemed to be held jointly as an undivided share. For properties held as tenants in common a trust deed is required to demonstrate that the property is owned in another ratio, say 30:70. A copy of that trust deed must be submitted with form 17 to HMRC, or the election to be taxed in unequal shares will not be accepted.
Legal advice should always be taken when changing the ownership of a property, and where the property is mortgaged, permission of the lender will be required.
Written by the Tax Advice Network