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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 Tom 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.
Tom made a loss of £3,500 (£3000 – 6500) on his property which can‘t be set against his trading profits. As Tom had 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 Tom 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)
Tom’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.
Further help
If you are a landlord and have a query about this topic, or any other tax-related issue, please get in touch, we’ll be happy to help. Email us at enquiries@torgersens.com.
The information provided in this blog is for general informational purposes only and should not be considered professional advice. As far as we are aware, the content is accurate at time of publication. Torgersens assumes no responsibility for errors or omissions in the content or for any actions taken based on the information provided.
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