Share this content
0
2259

Has anyone noticed?

New interest restrictions - Property Income

I was under the impression that the new restrictions were only meant to target HR tax payers, however it also appears to penalise those who would normally have personal allowances available to transfer to husbands/wives. The basic rate relief (25% this year) is only given as a tax credit at the bottom of the Tax Calculation and restricted to tax due. Has anyone else noticed this? Was this intentional or not thought through? I would love to know your views and whether it has affected other people's clients.

Replies

Please login or register to join the discussion.

19th Oct 2018 14:28

I assume you only have a couple of landlords, this was widely trailed at the time.

The only bit I was surprised about is that I thought the interest relief was ALL as a tax deduction, but at upto 35% this year, as opposed to a 75/25 split with 75% as a cost and 25% as a BR deduction. I wasn't quite sure if this was the bit in the transitional legislation when my eyes glazed over, or it was simpler to code it this way in the software.

Thanks (1)
avatar
to ireallyshouldknowthisbut
19th Oct 2018 14:56

My understanding is that 2017/2018 tax year the allowable interest is restricted to 75% with a 25% basic rate tax credit, 2018/2019 50% restriction with a 50% tax credit 2019/2020 25% restriction with a 75% basic rate tax credit then 2020/2021 onwards no interest but a full basic rate tax credit. I had looked up the HMRC Policy objective "To make the tax system fairer, the government will restrict the amount of Income Tax relief landlords can get on residential property finance costs (such as mortgage interest) to the basic rate of tax. This will ensure that landlords with higher incomes no longer receive the most generous tax treatment. To give landlords time to adjust the government will introduce this change gradually from April 2017 over 4 years."
We have a few landlords, not all have mortgages & most won't be affected. I hadn't seen any comments before about people losing married allowance.

Thanks (2)
to accountant567
19th Oct 2018 14:59

davidehanley-AT-xlninternet.co.uk wrote:

We have a few landlords, not all have mortgages & most won't be affected. I hadn't seen any comments before about people losing married allowance.

Give us some numbers. Show us how it affects your client.

Thanks (0)
avatar
to lionofludesch
19th Oct 2018 15:23

Pay 8102
profit L & P 4017
Interest 13
Total income 12132
minus P A 11500
Total on which tax is due £632

Taxable at basic rate £619 x 20% = £123.80
less relief for financial costs £123.80

If full basic rate relief was given then client would have been below the tax threshold & could have claimed married allowance, she would have paid some tax but husband would have benefited from full transfer

Thanks (0)
to accountant567
19th Oct 2018 15:30

accountant567 wrote:

Pay 8102
profit L & P 4017
Interest 13
Total income 12132
minus P A 11500
Total on which tax is due £632

Taxable at basic rate £619 x 20% = £123.80
less relief for financial costs £123.80

If full basic rate relief was given then client would have been below the tax threshold & could have claimed married allowance, she would have paid some tax but husband would have benefited from full transfer

But for the new rule, her income would've been

Pay 8102
Rents (4017-619) 3398
Interest 13 (covered by savings allowance)
Total 11500
PA 11500
Tax due 0

No better or worse off.

Thanks (0)
avatar
to lionofludesch
19th Oct 2018 16:15

She was actually entitled to £784 relief but it is restricted to £619 in the tax calculation therefore no tax due but no spare allowances to transfer (sorry I didn't make that clear)

Thanks (0)
to accountant567
19th Oct 2018 17:13

accountant567 wrote:

She was actually entitled to £784 relief but it is restricted to £619 in the tax calculation therefore no tax due but no spare allowances to transfer (sorry I didn't make that clear)

[sigh]

OK - we're dragging it out of you bit by bit. Well, if she was a single person, you'd need to take account of her carry forward of £165 x 20% = £33.

Under the old rules, she'd have

Pay 8102
Rents (4017-784) 3233
Total 11335
90% of PA 10350
Taxable 985
Tax £197

Husband would benefit by £230, leaving them £33 better off as a family, which is magically the same as she would have carried forward as a single person *.

*It's not magic really.

Thanks (0)
to lionofludesch
19th Oct 2018 17:53

lionofludesch wrote:

Husband would benefit by £230, leaving them £33 better off as a family, which is magically the same as she would have carried forward as a single person *.

Note that, under the old rules, a single person wouldn't have any carry forward of £33. They'd just lose £165 of personal allowance. They would be winners under the new rules.

Thanks (0)
to accountant567
19th Oct 2018 15:43

You don't need to be below the PA threshold to transfer marriage allowance. HMRC say (or said) you do but the legislation does not.

Thanks (1)
to Duggimon
19th Oct 2018 16:01

Wouldn't make any difference on the numbers above.

She'd pay what he saves. If she'd had dividends, it gets more murky.

Thanks (0)
to lionofludesch
23rd Oct 2018 15:28

Sure, I was responding to the OP. It seemed to me their issue was in thinking under the new interest mechanism, the MA transfer couldn't be made because their income didn't dip below the PA, I was pointing out the transfer can still be made and so the saving, per the example, remains the same across the couple.

Thanks (1)
avatar
to Duggimon
25th Oct 2018 15:34

Not true, I had this argument a few weeks ago. The legislation has been updated to specifically refer to the PA.

Thanks (0)
19th Oct 2018 14:47

I'm comfortable with this.

I can carry my interest tax credit forward but I can't carry my personal allowance forward. For folk on the cusp of paying tax, it's possibly better. Depends on the numbers, obviously.

Thanks (1)
avatar
22nd Oct 2018 20:24

The problem of the 25% deduction is a problem where there is a loss as this can be lost though there is a mechanism to carry forward

Thanks (0)
to carnmores
23rd Oct 2018 08:19

It's not lost if you can use it later.

I actually think the new system is slightly better for taxpayers with income around £12000, sometimes above the personal allowance, sometimes below.

Thanks (0)
avatar
to lionofludesch
23rd Oct 2018 11:06

Lion good to see you in full contribution flow! I am sticking to my guns it can be lost. the 25% unrelieved is carried forward and reintroduced to the percentage equation the following year , so if there are continuing losses the vast majority of the unrelieved interest CAN be lost, i did not say WILL though there is a high probability that that could arise

Thanks (0)
avatar
to carnmores
23rd Oct 2018 11:21

carnmores wrote:

........ , so if there are continuing losses the vast majority of the unrelieved interest CAN be lost, i did not say WILL though there is a high probability that that could arise

But that's no different from any other costs. If there are continuing losses then those costs are lost.
Thanks (0)
to Wanderer
23rd Oct 2018 11:36

Wanderer wrote:

carnmores wrote:

........ , so if there are continuing losses the vast majority of the unrelieved interest CAN be lost, i did not say WILL though there is a high probability that that could arise

But that's no different from any other costs. If there are continuing losses then those costs are lost.

Agree. There's a better chance you'll be able to use it under the new system. But nothing's guaranteed. In particular, if you're going to make constant losses, you've just made a bad business decision.

Thanks (0)
avatar
to lionofludesch
23rd Oct 2018 11:50

again not necessarily , you may have bought these properties for CG purposes rather than income

Thanks (0)
avatar
to Wanderer
23rd Oct 2018 11:48

Not so! the landlord could return to profit but below the PA in that case the other costs / losses would have been relieved and to tax would be payable but there would be no tax deduction available as no tax was payable

Thanks (0)
to carnmores
23rd Oct 2018 11:53

Again - no worse than the old system.

Thanks (0)
avatar
to lionofludesch
23rd Oct 2018 14:57

would you care to elucidate?

Thanks (0)
to carnmores
23rd Oct 2018 15:17

Sure.

Old system - Interest causes landlord's profits to fall below personal allowance. Allowances lost.

New system - Landlord cannot use interest credit. Credit carried forward.

If he can use the credit, he's better off than under the old system. If he never uses it, he's no worse off.

Thanks (0)
avatar
to lionofludesch
23rd Oct 2018 18:03

landlord can never be better off under the new system

Thanks (0)
to carnmores
23rd Oct 2018 18:17

I believe you're mistaken but I'm unwilling to push the point further. My previous post gives a clear example of such a situation.

Thanks (0)
avatar
23rd Oct 2018 18:24

fair enough and thanks for your answers. i will put it down for now and re read everything in a day or two

Thanks (0)
to carnmores
23rd Oct 2018 19:45

Here - try this simple example.

Rents £15000, Interest £8000.

Old rules

Rents 15000
Int 8000
Net 7000
PA 11500
PA lost 4500

New rules
Rents 15000
Int 6000
Net 9000
PA 11500
PA losr 2500

Interest carried forward £2000

Thanks (0)
avatar
24th Oct 2018 10:16

The whole question of property investment is getting a bit tasty. Some of my Development clients are carrying masses of losses-in the tens of thousands-yet argue they achieve capital growth. I know round here post Brexit values have fallen. But give that pensions are lousy and you can only lose money on cash-property investment still seems the only way to go ?

Thanks (0)
to Michael Davies
24th Oct 2018 11:21

Bitcoins mate, get on it, the bubble will never burst.

Thanks (0)
By djn24
24th Oct 2018 10:53

Am I right in saying that if there is a loss due to the interest (the 25% relief part), that loss wont be carried forward.
So e.g:
Rent £5,000

Interest £6000
So £4,500 is allowable against the rent. The other £1,500 allowable as a deduction @ 20%.
However this is restricted in this case to £500 @20% and the £1000 is ignored and not carried forward?

Thanks (0)
to djn24
24th Oct 2018 11:03

You would be absolutely wrong, sir.

Thanks (0)
avatar
By ugdiv
24th Oct 2018 13:44

I asked a similar question a while ago.
https://www.accountingweb.co.uk/any-answers/mortgage-interest-restrictio...

Although Lionofludesch states in his simple and clear example that the interest credit can be carried forward, I can't find where this is recorded in the tax return. Can't find it in the Taxcalc data either.

This figure could easily get lost if client disappears off to another accountant.

Thanks (1)
By djn24
to ugdiv
24th Oct 2018 13:54

ugdiv wrote:

I asked a similar question a while ago.
https://www.accountingweb.co.uk/any-answers/mortgage-interest-restrictio...

Although Lionofludesch states in his simple and clear example that the interest credit can be carried forward, I can't find where this is recorded in the tax return. Can't find it in the Taxcalc data either.

This figure could easily get lost if client disappears off to another accountant.

I'm having the same issue using CCH. Can't see the loss getting carried forward at all.

Thanks (1)
to djn24
24th Oct 2018 14:15

Then you must keep your own records until the software catches up.

Thanks (1)
avatar
25th Oct 2018 14:33

Lion I have had what passes for a rest and have picked it up again. i suppose where we disagree is that the loss of tax relief on an actual amount spent (interest) is different from the loss on a notional personal allowance, semantics perhaps

Thanks (0)
to carnmores
25th Oct 2018 14:46

No, that's not where we differ. I'd put it thus...

Which would you rather have ?

a. A relief for the future which you may never use, or

b. A relief you definitely can't use. Ever.

Thanks (0)
Share this content