Mortgage relief restriction – Does the change in interest rate affect landlords?
You will be aware of the recent increases in the Bank of England base rates which currently stands at 4%, up from an all-time low of 0.1% only just over a year ago. What you may not have realised yet is what effect this has on a non-corporate landlord’s tax position.
With the advent of higher interest rates, the restriction to claiming higher rate tax relief on mortgage interest is becoming increasingly important.
Here is an example, based on the following assumptions:
- £400,000 property producing £20,000 of rent per annum.
- An LTV of 75% gives a £300,000 mortgage.
- A historic mortgage interest rate of 1%.
- A future mortgage interest rate of 4.9%.
- Other property expenses of £2,000 per annum.
| Historic base rate position | Current base rate position | |
|---|---|---|
| Economic position | £ | £ |
| Income | 20,000 | 20,000 |
| Mortgage interest (1.0% vs 4.9%) | (3,000) | (14,700) |
| Other expenses | (2,000) | (2,000) |
| Tax | (6,600) | (4,260) |
| Profit/(Loss) | 8,400 | (960) |
Historic position
Whilst the interest rates were low, 1% in our above example, the effect of the interest restriction on rental properties was manageable, as can be seen in the first example above. You will note that although the mortgage relief restriction applied in both examples, whilst the interest rates were low, the property historically made an overall profit of £8,400.
Current position
If you are on a variable rate, or your fixed rate has come to an end (or will do soon) then the profitability of your property portfolio could be very different from what you have historically achieved, as shown in the second column above.
You will see that the mortgage interest has increased significantly, to 4.9% in our above example tracking the base rate increase over the past fourteen months. As a result of a combination of the increased mortgage interest payable and the interest restriction, the above calculation shows that, although the overall tax cost has been reduced, our example property is now actually making a loss of £960.
If you are on a repayment mortgage the capital repayment element of your monthly payment is going to enhance the effect of this loss from a cashflow perspective, as historically the capital repayments would be funded by the property profits, whereas in a loss position, these will need to be financed out of your other income/capital reserves.
To put yourself in a break-even position in the above example, rents would need to increase by £1,600 to £21,600, an 8% rental increase.
Those with smaller loan value mortgages may not be affected to this extreme, but all higher, and additional, rate taxpayer property owners should consider whether retaining their rental property still makes sense in this new ‘high’ interest world.
Although these changes do not affect corporate property owners, the tax of corporates may also increase to a lesser extent as a result of the proposed increase in corporation tax rates from 19% to 25%, but this will depend on the specific position of the corporate owner.
Ballards LLP’s property team has extensive experience acting for property-related businesses and can assist investors, developers, and associated trades with all financial property matters including; tax-efficient structuring, SDLT planning, Annual Tax on Enveloped Dwellings planning and reporting, and any other financial matters associated with property ownership. We act for all sizes of businesses.
If you would like to find out how we can help please contact Martin Adams at martin.adams@ballardsllp.com or Tamara Shaw at tamara.shaw@ballardsllp.com.
Disclaimer.
This article has been prepared for information purposes only. Formal professional advice is strongly recommended before making decisions on the topics discussed in this release. No responsibility for any loss to any person acting, or not acting, as a result of this release can be accepted by us, or any person affiliated with us.
