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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.
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