The government’s recent changes to residential property investment rules came as a surprise to many. However, the biggest surprise by far was removing the ability to claim the interest on funds raised to purchase a residential investment property. While some of the rules are yet to be ironed out, we thought it would be helpful to put some numbers around what the financial impact could be.
Owning a residential investment property is just like any other investment. You have a Product: accommodation for your tenants, Income: the rent you receive, and Expenses such as rates, insurance, and maintenance. Prior to the rule changes you were also allowed to deduct interest on any funds you have raised to purchase residential investment property (nb you can still claim an interest expense on funds raised to purchase a commercial property).
Existing landlords are being granted a grace period whereby the interest they can claim reduces by 25% each year for four years. This means that in the 2025-26 and later tax years, they will not be able to claim any interest expense as a deduction against their income.
For landlords that purchase a residential rental property after March 27, 2021, they will not be able to claim any interest expense from October 1, 2021. The government is proposing an exception for new build properties however this is subject to a consultation process.
Our summary below shows the impact and tax payable for a residential property investor who purchases an existing property for $900,000 in their own name. We’ve assumed they borrow all of the purchase price by using equity in other property as security. We’ve also assumed they are on a 33% marginal tax rate (income levels between $70,000 to $180,000).
Basic Profit and Loss statement pre-changes:
In the example above, the investor would have no tax to pay. Now let’s have a look at what happens when the interest deductibility is removed.
In the above example, the property investor would have to pay tax of $9,000 (33% of $27,000).
Everyone’s situation is going to be different so if you’re a property investor looking for some advice on what impact the changes will have on you, please feel free to contact us so that we can work with your advisers to make a plan going forward. Contact us here, or on 0800 809 009.