Finance Cost Relief for Residential Let Outs

Accounting Owl Solutions
Apr 1, 2023
1 min read

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