A would-be property investor will need to be able to fund the purchase of their investment property. They may choose to do this personally or via a company. If they do not have the funds available, they will need to borrow them. The tax relief that may be available depends on the route taken.
Personal borrowings
The investor may choose to take out a mortgage on the investment property or, alternatively, remortgage their home where this secures a lower interest rate. Where personal borrowings are used to fund the purchase, tax relief is available for the interest on a loan up to the value of the property when it was first let. The loan does not need to be secured on the investment property to qualify for relief.
The way in which relief is given and the rate of relief depend on the type of let.
For residential lets, the interest (and other finance costs) cannot be deducted in calculating the taxable rental profit. Instead, relief is given as a tax reduction, with the tax payable on the rental profit reduced by 20% of the interest and finance costs. If interest and finance costs cannot be relieved in the year in which they are incurred (for example, if there is no tax to pay because the property business made a loss), they are carried forward and may be relieved (by a tax reduction) in subsequent years.
Where the let is a furnished holiday let or a commercial let, the interest and finance costs can be deducted in full in calculating the rental profit or loss. In this way, relief is given at the landlord’s marginal rate of tax.
Corporate borrowings
If the property is to be purchased and held in a company, and the company borrows funds to facilitate the purchase, the associated interest and finance costs are deductible in full in calculating the company’s profits for corporation tax.
Director lends funds to a company
Instead of the company taking out a loan, the director may wish to introduce funds into the company which can be used to buy the investment property. The company may pay the director interest on the loan. This too will be deductible in calculating the company’s taxable profits. However, the company must deduct income tax at 20% from the interest paid to the director and account for this quarterly to HMRC on form CT61. The director would be taxed on the interest received (to the extent it exceeds his or her personal savings allowance) but will receive credit for the tax deducted by the company.
If the director borrows the funds to lend to the company, for example, by releasing equity from his or her home, they will be able to benefit from tax relief on the loan (assuming the company is a close company). However, the company must rent the property out rather than hold it as an investment for the relief to be forthcoming.
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