Refinancing your UK property? Know the tax implications

December 29, 2016
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By Alison Walker

Allison Walker, Tax Director at Taylor Cocks Partnership Limited answers the all-important question for investors investing through a UK property Syndicate – What are the tax implication for investors if the syndicate were to opt for refinance on their properties?

Starting April 2017, changes are being made to the tax relief available for finance costs, such as loan interest, for a rental property business. However, the change will not remove all tax relief on these costs, and in fact, if the investor is a basic rate tax payer, there will be no change to the amount of tax relief they can claim.

The change to the tax relief is that instead of deducting the finance costs as allowable expenses when calculating the taxable profits for the property, the individual will be able to deduct 20% of the finance costs from their total tax bill. This change is being gradually introduced over the next three tax years.

For example, if an individual has rental profits of £5,000 and incurred finance costs of £1,000 up until April 2017 they would be able to deduct the £1,000 from their rental profits. This would mean that the taxable profits are £4,000. If they are a basic rate tax payer, they will pay tax on this at 20% (£800). If they are a higher rate tax payer, they will pay tax on this at 40% (£1,600).

By April 2020, the individual would no longer be able to deduct their £1,000 finance costs from their rental income. Therefore, their taxable rental profits would be £5,000. However, when calculating the tax due, we would be able to deduct 20% of the finance costs (i.e. £200) from the tax due. Therefore, for a basic rate tax payer, they would still only pay tax of £800. This is calculated as tax of 20% on £5,000 of profits (£1,000) minus the £200 tax reducer (for 20% of the £1,000 finance costs). However, a higher rate tax payer would owe tax of £1,800.

The changes are being phased in over the next three years, as follows:

 

 

Tax Year

Percentage of finance costs deducted from rental profits Percentage of finance costs used in tax reducer calculation

2017-2018

75% 25%
2018-2019

50%

50%
2019-2020 25%

75%

2020-2021 0%

100%

For example, for the 2017-18 tax year, the investors will still be able to deduct 75% of their finance costs from their rental profits. They will then be able to claim the tax reducer on the remaining 25% of the costs. Using the example above, this would mean that 75% of the £1,000 finance costs (£750) could be deducted from the rental profits of £5,000, to leave taxable rental profits of £4,250. The tax calculated on this (at 20% or 40%) would then be reduced by 20% of the remaining costs of £250 (£50).

Please note that in order to claim tax relief or tax reducer on the finance costs, they must be incurred wholly and exclusively for the property rental. Given the above, the new rules will only impact upon higher rate UK taxpayers.