Newsletter issue – March 2023

As an individual landlord you can‘t deduct finance costs, including interest, from your residential property rents for tax purposes. Instead, you get tax relief for those costs as a basic rate tax credit calculated as 20% of the lower of:

• finance costs for the year plus any unused finance charges brought forward;
• your property income profits with no deduction for finance costs, - or your adjusted total income for the year that exceeds your Personal Allowance.

In years where the property income is low, or a loss, little or no tax credit can be set-off, in which case the excess interest which is not relieved is carried forward to the next tax year.

Example

In 2021/22 Bob the Builder had trading profits of £13,500. It was his first year in which he let out a property and he received rents of £3,000, paid mortgage interest of £4,000 and incurred £6,500 of allowable expenses.

Bob made a loss of £3,500 (£3000 – 6500) on his property which can‘t be set against his trading profits. As Bob has zero property profits for the year, he can‘t set off a tax credit derived from his finance costs against his 2021/22 tax liability.

However, both his property loss of £3500 and the unused finance costs (£4000) are carried forward to the next tax year.

In 2022/23 Bob has a better year. He received rental income of £18,000, paid property expenses of £1500 and £6000 as interest. The loss from 2021/22 of £3500 is set against his rental income. His trading profits have also improved to £26,000.

The amount of tax credit is calculated as 20% of the lower of:

• finance costs= £10,000 (£4,000 + £6000)
• net property profits = £13,000 (18,000 – 1500 – 3500)
• adjusted total income = £26,430 (26,000 + 13,000 - 12,570)

Bob‘s tax credit for 2022/23 is calculated as £10,000 x 20% = £2,000.

He has used all his property loss and obtained tax relief for the unused interest paid in 2021/22.

There is no limit on how many years the unrelieved finance costs can be carried forward.