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Finance Cost Relief for Residential Let Outs



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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