Individual landlords who own residential properties should be well aware of the block on the deduction of interest and finance charges from their rental income. This increases their taxable profits without increasing their accounting profit, but the tax increase is partially softened by a tax credit equivalent to 20% of the blocked interest.
The government said this tax change would only affect higher rate taxpayers, as basic rate tax relief was given through the 20% tax credit, but that is not the case.
We need to check whether you are caught by any of the knock-on effects of the restriction on interest deductions:
- Loss of marriage allowance as the higher earner is now taxed at 40%.
- Liable to have child benefit clawed back through the HICBC, as gross taxable income now exceeds £50,000.
- More tax to pay on savings income as the personal savings allowance is reduced from £1000 to £500 once total taxable income exceeds the 40% threshold.
- More tax to pay on saving income because the starting rate for savings (0% on up to £5000) no longer applies if non-savings income eats into that band.
- Higher student loan repayments as gross taxable income is higher and exceeds the repayment threshold.
- Liable to pay higher amounts of child maintenance.
- CGT due at 20% rather than 10%, as marginal income tax rate is now 40%.
- Paying tax on dividend income at 32.5% rather than at 7.5% and total taxable income is now in higher rate band.
- Loss of personal allowance as total taxable income exceeds £100,000.
- Reduction in pensions annual allowance as total taxable income exceeds £150,000.
- Ineligible for tax free childcare account as total income exceeds £100,000.
- Loss of 30 hours free childcare.
As the interest restriction is being tapered in, with 25% blocked in 2017/18 and 50% blocked in 2018/19, the full effect won’t be felt until 2020. However, some or all of the above may well apply to you for 2018/19.
Written by the Tax Advice Network