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Rental Tax Changes

With the Government's latest legislation changes to remove various tax deductions and previously introducing ring-fencing on rental losses - residential rental properties aren't the great investment that they once were.

Property is still a great investment, in that you will nearly always make gains on the sale of the property. Actually being a landlord though, has very little attraction or benefit anymore.

The Government previously released draft legislation around the removal of tax deductions on loan interest for rental properties. Up until now, interest payments could be claimed as a business expense and taxed accordingly, giving property investment a tax advantage.

Now, properties bought from April 2021 onwards will not be able to claim any tax deductions for the interest paid on the mortgages. For all existing rental properties, including holiday home rentals, the tax deductibility is being phased out over four years.

Changes take effect from 1 October

Until October, the old 100% interest tax deductibility is in place. Then on 1 October this year, rental property tax deductibility reduces to 75%: you can still claim three-quarters of your interest payments as a business expense and get a tax advantage. The 75% rate remains in place until 31 March, 2023.

For the following financial year (1 April 2023 to 31 March 2024), you’ll be able to claim 50% of your interest payments as a business expense against your rental income. Then it drops to 25% for the next financial year (1 April 2024 to 31 March 2025). From 1 April 2025 onwards, no interest deductibility will be available.

There are some exemptions, including:

  • Your main home
  • New builds
  • Commercial property
  • Farmland

You can read the new legislation here or a simpler summary of the changes here.

What should you do?

To assess how much impact this will have on your situation, we can calculate the difference this is likely to make to your overall gains or losses in the years ahead. Our forecasts will be a good guide, but the exact situation will vary depending on several other factors, too. For instance, as interest rate deductibility reduces, you may also find that rents increase to help you meet the higher costs. However, your mortgage interest payments may also go up, if (as seems likely), interest rates increase over that time.

Ideally, you should think carefully about your rental properties and whether they will still be fulfilling their role in your financial strategy. You might choose to keep them – switching from interest-only to principal-and-interest repayments could be a way to start reducing your interest costs over time. Or you could sell up and invest the proceeds somewhere else

Talk to us to get a better understanding of what your position will be when these tax changes come into effect, so you can make smart decisions about your financial future.