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If you are a personal landlord with a mortgage or loan on a residential let you may be aware of the restriction on the amount of tax credit relief that can be claimed on interest paid. Usually, this amount is 20% of the interest paid in any one year. However, there are circumstances where a further restriction (a 'cap') may apply. The 'cap' is 20% of the lower of the:

  • interest claimable in the tax year
  • profits of the business for the tax year; and
  • the landlord's adjusted total income (after losses and reliefs but excluding savings and dividend income) that exceeds the personal allowance for them

Although 'capped', the interest relief is not entirely lost as any amount not used in one year is carried forward and added to the loan interest figure of the following year.

Example

Steve is employed and earns £15,000 a year. He rents out a residential property at an annual gross rent of £20,000 with expenses of £3,800 creating a profit of £16,200. Mortgage interest of £6,000 has been paid and there was a loss brought forward of £(4,000). There is also an amount of £7,500 interest that was unable to be used in the previous year and has been brought forward to be included in the interest calculation for the current tax year.

The amount available as a tax credit is 'capped' at the lower of:

  • interest - 20% of £13,500 (£6,000 + £7,500) = £2,700;
  • property profits - 20% of £12,200 (£16,200 - £(4,000)) = £2,440;
  • adjusted taxable income - 20% of £27,200 (£15,000 + £16,200 - (£4,000) -£12,570) = £2,926.

Therefore, the amount of tax credit claimable for loan interest relief is £2,440 with the balance of unrelieved finance costs of £1,300 (£13,500 - £12,200) available to be carried forward to the next tax year. Should the amount of tax credit reduction be calculated to be less than the tax liability, then the tax liability is reduced to nil as a tax credit cannot create a tax refund.

Please note that these rules do not apply to furnished holiday lets as the profits on such lets are treated as a business and as such interest payments are allowable in full. They also do not affect landlords with commercial properties, or those properties held within a company structure.

About the Author

Martin Johnson Image

Martin Johnson

Partner
With expertise in advising family-owned companies on a range of tax, accountancy and business issues, Martin also has an in-depth knowledge of the automotive and property sectors. In addition, he provides advice on inheritance tax planning and financial management to owner-managed businesses.  Martin leads the firm in developing its expertise in the buy-to-let sector, advising both residential and commercial property owners on relevant tax and legislation issues. A further element to Martin’s role is to build Torgersens’ relationships with banks, financial advisors and specialists in commercial and employment law to ensure that the firm’s clients have access to market-leading guidance.  

To get in touch please e-mail martin.johnson@torgersens.com.

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