7 August 2018
This month we look at mitigating the impact of restrictions on mortgage interest relief for a landlord, benefit-in-kind relating to an electric car and the tax implications of a written-off loan.
Q. As a landlord with several rental properties, is there anything I can do to reduce the impact of the restrictions on mortgage interest relief?
A. The restrictions on the amount of income tax relief that some landlords can obtain on residential property finance costs (such as mortgage interest) are being phased in over four years starting from 6 April 2017.
Deductions for finance costs related to residential property will be restricted as follows:
- in 2017/18, the deduction from property income is restricted to 75% of the finance costs;
- in 2018/19, the restriction is 50%;
- in 2019/20, the restriction is 25%; and
- from 2020/21 onwards, no such finance costs incurred by a landlord will be allowed as a deduction.
To mitigate the impact of these restrictions, the following could be considered:
- legally transferring some of your rental income to another person (eg. a spouse or civil partner);
- reducing your borrowings, which in turn will reduce future interest payments;
- incorporating your property business; or
- turning your rental property into a qualifying furnished holiday letting (the restrictions do not apply to this type of property business). See our recent blog for further information on this type of investment.
Professional and legal advice is, of course, strongly recommended before making any changes.
Q. I am considering buying an all-electric vehicle, to use for travelling to and from work. If my employer installs a charging point at his premises, would this be considered a benefit-in-kind for tax purposes?
A. In the case in which an employer provides facilities for charging their employees’ all-electric or plug-in hybrid vehicles at the workplace, this is treated as a taxable benefit-in -kind and is subject to income tax for employees and employer Class 1A National Insurance contributions.
However, the government announced in Autumn Budget 2017 that an exemption would be introduced to remove any income tax or NIC liability for charging electric vehicles at work with effect from 6 April 2018. The draft legislation is contained in Finance Bill 2018-19 and is under consultation until 31 August 2018.
There is already an exemption for the provision of charging facilities which applies to taxable cars and vans.
Q. My company borrowed money from another private company, but the loan has now been written off because the lender company has been dissolved. What are the tax implications of this write-off?
A. A company will have a trading loan relationship, as a borrower, if it entered into the loan relationship because of its trade. So, for example, a loan taken out to purchase machinery for a manufacturing trade, or to finance an expansion of its trade, will be a trading loan relationship.
Debits and credits arising from a trading loan relationship for an accounting period, are
- treated as receipts and expenses of the trade, and
- taken into account in computing profits or losses of the trade for that period.
The legislation provides that any debit may be deducted in the computation of trading profits, regardless of whether it relates to capital or income or would otherwise be disallowed by the Corporation Tax Act 2009, section 54 (the ‘wholly and exclusively’ rule).
In most cases, if the companies are connected, there will be no tax implications for your company. However, if the companies are not connected, your company will be subject to tax for the amount of the write-off.
For further guidance on the loan relationship rules for connected parties, see the HMRC Corporate Finance Manual.
For further information about any of these topics, please speak to one of our accountants in Newcastle, Jarrow or Sunderland.
As one of the leading firms of accountants in the North East, with offices in Newcastle, Sunderland and Jarrow, we have the expertise to advise you on a wide range of tax related issues. If you would like to speak to one of our local experts, please contact us.