You, as a landlord, should do all in your power to keep your rental property in tip-top shape, both to attract new tenants and to keep the ones you already have happy. But these costs may mount up rapidly, putting a strain on the landlord's finances. That's where “finance cost relief for residential let-outs” comes into the picture.
What is Finance Cost?
Treatment of deductions of Finance Costs (Basic Rate Tax Credit):
a) Year 2016/17 & before:
Total Finance cost was allowed as a deduction from the Rental Income/Profits.
b) Year 2017/18, 2018/19 & 2019/20
Year | % of Finance Cost Deductible from Rental Income | % of Basic Rate Tax Reduction / Credit |
2017/18 | 75% | 25% |
2018/19 | 50% | 50% |
2018/19 | 25% | 75% |
c) Year 2020/21 & onwards:
20% of the Finance cost is allowed as a deduction from Tax on Rental income / Profits.
If the Rental profit is less than the finance cost, the deduction is limited to 20% of the rental profits.
Example:
Joy is a UK Resident having the following income & expenses:
a) Rental Income of £20,000 a year, and
b) Other Income of £33,000 a year
c) Mortgage Interest of £7,000 a year.
d) Other allowable expenses of £3,000 a year.
Solution:
a) 2016/17 & Before:
Sr. No. | Particulars | Amt (£) | Remarks |
1 | Rental Income | 20,000 | |
2 | Other Income | 34,000 | |
3 | Total Income | 54,000 | |
4 | Less: Mortgage Interest | (7,000) | Finance Cost |
5 | Less: Other Exp. | (3,000) | |
6 | Net Taxable Income | 44,000 | |
7 | Net Tax Payable | 6,300 | 20 % x 31,500 (44,000 – 12,500*) |
*£12,500 is related to the personal allowance.
b) 2020/21 & Onwards:
Sr. No. | Particulars | Amt (£) | Remarks |
1 | Rental Income | 20,000 | |
2 | Other Income | 34,000 | |
3 | Total Income | 54,000 | |
4 | Less: Mortgage Interest | 0 | Finance Cost |
5 | Less: Other Exp. | (3,000) | |
6 | Net Taxable Income | 51,000 | |
7 | Gross Tax | 7,900 | 20 % x 37,500 + 40% x 1000 (51,000 – 12,500) |
8 | Less: Tax Credit | (1,400) | 20% x 7,000 (i.e. 20% of Mortgage cost) |
9 | Net Tax Payable | 6,500 | |
Points to Note:
i) Maximum Tax Credit = 20% of (Finance cost, Rental Income or Taxable Profit,
whichever is less)
ii) In other words, finance costs will not reduce tax on other sources of income.
iii) This will not create a situation of negative tax.
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