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25th September 2015
Posted in Articles, Featured Articles, Private Client, Property Tax by Laura Hutchinson
The Issue
HMRC currently allows finance costs on rental property to be tax-deductible to the extent that the loan does not exceed the value of the property when it was first rented out.
Example
John bought a rental property for £100,000 in 1995 which is now worth £450,000 and has a £30,000 mortgage on it. He now wants to take out a £350,000 mortgage to buy a new private residence. If he secured a loan on his rental property he would be able to borrow a further £70,000 (‘headroom’ from original purchase price) and obtain tax relief on the finance costs – so tax relief on far less than his new borrowings.
Opportunity
John could gift the rental property to his wife and then she could secure finance to buy the private residence. The advantage of this is that she would be able to obtain tax relief on borrowings up to £450,000 (its value when it is first rented out by her). In this way taxable rental profits will be significantly reduced or extinguished.
Importantly there are no capital gains tax or SDLT implications of an inter-spouse gift.
Final Comment
his kind of planning needs to be undertaken with regard to the new rules coming in from 2017 which restrict tax relief for finance costs at higher tax rates – although an inter-spouse transfer will generally be helpful for the purposes of this legislation too. Also, as a general rule individual property investors should be considering the merits of incorporation before it is too late.
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