Relief for mortgage interest on let properties
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.
BLOG POSTS
Posted on Mon, 3 Aug 2015
Posted on Mon, 3 Aug 2015
Posted on Wed, 29 Jul 2015
TWITTER
Tweets by @OWSupportLATEST TAX TIPS AND NEWS
Cuts to National Insurance contributions and the abolition of so-called ‘non-dom’ tax breaks were among the headline announcements in the...
You‘ve probably digested the main news by now from the Spring Budget. Now comes the next stage: the Spring Finance Bill. The bill was published...
You may have seen somewhat of a furore breaking out in the media towards the end of the month, as HMRC announced its tax helpline would shut down for...
We‘ve seen plenty of speculation before the last two Budgets that Inheritance Tax would see major reforms. Yet nothing materialised. And the...
Funerals that are broadcast online for well-wishers unable to attend in person are becoming exempt from VAT. During the COVID pandemic, streaming...
Q: I’m a property owner, and I’m considering renting one of my houses out for people to use for vacations. What are the tax rules I need...
New tax year begins; new tax codes take effect....