Tax relief is allowed on interest paid on mortgages/loans taken out to finance the purchase of assets held within a business. Landlords who own two or more properties are deemed to own a ‘portfolio’ of business assets.
Lenders have designed products that treat the ‘portfolio’ as one single business account regardless of the number of properties purchased or whether the full amount of capital has been utilised. The individual properties may have separate mortgages each with different interest rates charged but the ‘portfolio’ is treated as one single business account. ‘One portfolio’ means one agreement, one monthly payment and one mortgage statement.
Should not all of the capital be used, tax relief on interest payments is still fully allowable because the original reason for the mortgage/loan remains, namely to finance the use of capital by a property business.
However, if the capital amount exceeds the value of the property when first let the interest on the amount by which it is exceeded is disallowed.
As from 6 April 2017 tax relief at higher rates on interest paid is being phased out over a four-year period such that by the tax year 2020/21 only basic rate relief will be claimable as an income tax reduction (see Tip 18).
Avril owns six properties with a total value of £2m. With a portfolio mortgage outstanding of £1.7m there is a ‘shortfall’ of £300,000. This amount is not the equity found in any one property, but in the portfolio spread over the six properties.
Therefore £300,000 is available for further investment. The interest is tax deductible in full in 2016/17, reducing over a four-year period such that basic rate relief only is available for 2020/21 onwards.
This is a sample tip taken from our 112 page guide:101 Tax Tips For Landlords 2016/17