George Osborne’s announcement in the Summer budget of the phasing out of higher-rate tax relief on landlords’ interest payments could have major consequences for the residential property market in the South East.
Where landlords have maximised their borrowings with a view to enjoying capital growth on their property portfolios, the change to the interest relief rules combined with the anticipated rise in bank base rates could lead to an adjustment towards owner occupation.
Landlords may seek to restrict their financial exposure by disposing of parts of their property portfolios. An alternative will be to increase rents, but with tenants already applying a significant proportion of their income on accommodation costs, full recovery of the increased finance and taxation costs may not be possible. Landlords who are currently basic rate taxpayers should not think that they are immune to the changes which could have the effect of pushing them into higher rates of income tax.
Many rental property owners may now be considering moving their assets into corporate structures where interest relief restrictions do not apply but without proper planning there could be more unwelcome tax charges on making the transition. Landlords considering incorporation should take advice on whether the nature of their rental activities constitutes a ‘business’ which might permit a tax-free incorporation and the possible impact of Stamp Duty Land Tax on the transfer of a property into a company should not be ignored.