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Interest paid - do new rules affect Tax Credits?

Interest paid - do new rules affect Tax Credits?

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This may be a basic question, and apologies if it is, but when the new rules on interest relief on rental properties comes in, the "disclosed" profit will be before deducting interest, I presume, with relief given as an adjustment in the tax calculation, so will this higher profit figure be the one used for the Tax Credit claim form, or will claimants still be able to deduct the interest?

If I've got the layout right in my head, the SA302 will show the higher profit so this will help in mortgage applications, assuming the lenders will still be treating that form as the "holy grail" ;)

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By norstar
12th Feb 2016 19:25

Higher gross

The gross income figure will include rental profits but exc interest, and we've already heard how this could affect those who receive child benefit (for example) as their taxable gross income will increase under the new rules. So I see no reason why tax credits would use a different calculation for the gross figure. The tax credit for interest appears to act in a similar way to the (now former) dividend tax credits and reduce tax payable so yes, it could reduce tax credits payable.

As to mortgage applications, in theory the gross per SA302 will be higher, but bear in mind that lenders assess affordability these days, so they will still likely adapt their approach to take into account the spend on interest and other mortgage repayments even if it's not in the gross figure.

 

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By birdman
15th Feb 2016 12:45

re Higher Gross

Thanks norstar - this will hit one client hard, she has properties from a divorce settlement which give a low income because of large borrowings, currently gets decent sum in tax credits; ex-husband abroad, non-UK national, no chance of reviewing settlement (apparently no assets anyway).

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By Tim Vane
15th Feb 2016 13:17

It seems to me that that is largely the purpose of the legislation. She is effectively using tax credits to subsidise her property portfolio. Which doesn't sit right with me.

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By birdman
15th Feb 2016 13:39

Hmmm..

Not so sure about that Tim, although I agree with the broad sentiment. As a couple they decided to have kids and for her to be a stay at home parent to their kids, they bought a few properties, he flits off abroad and leaves her with his debts and the properties, none of which could be sold for an amount to cover the mortgages (partly due to his actions and unknown to her - fraudulent, basically), so she has young children, negative assets and no real job  prospects. Bit tricky to know what to do imho.

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By airgeadagam
15th Feb 2016 14:00

What to Do

Would it not depend on in what capacity you were acting as an accountant? If it was in a non-advisory capacity would one not just act according to the information received? However if acting in an advisory capacity, surely an accountant would need to advise based on the best outcome for the client - regardless of whether or not he agreed morally with their position on tax credits? Otherwise the client's financial position would be dependant on the personal view of the accountant.

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