For tax years up to 2016/17, full tax relief is available for interest on a loan used in a property business. The funds may have been used to purchase the let property, to make major repairs, or just to fund the working capital of the property business.
From April 2017, tax relief on interest in property businesses (including single buy to lets) will be restricted so that by 2020, interest will not be an allowable expense in computing the profits of the business, but will attract tax relief at 20%. This affects:
- UK resident individuals that let residential properties in the UK or overseas,
- non-UK resident individuals that let residential properties in the UK,
- individuals who let such properties in partnership and,
- trustees or beneficiaries of trusts liable for Income Tax on property profits.
The change does not affect furnished holiday lettings.
Every year, landlord A receives £10,000 in rental income and pays interest of £5,000 in respect of the mortgage used to buy the property. The tax position will be for a 40% tax payer: is set out below.
Up to 2016/17 all of the allowable interest is deducted from rental income to arrive at the taxable profits.
For 2017/18 75% of the finance costs is deducted from rents. The remaining 25% is given as a basic rate deduction This part of the interest is restricted to relief at 20% so in the worked example below £1,750 x 20% = £350.
For 2018/19 50% of the finance costs is deducted from rents. The remaining 50% is given as a basic rate deduction This part of the interest is restricted to relief at 20% so in the worked example below £2,500 x 20% = £500.
For 2019/20 25% of their finance costs is deducted from rents. The remaining 75% is given as a basic rate deduction This part of the interest is restricted to relief at 20% so in the worked example below £3,250 x 20% = £650.
For 2020/21 and subsequent years none of the finance costs can be deducted directly from rents. It is instead wholly given as a basic rate deduction The interest is restricted to relief at 20% so in the worked example below £5,000 x 20% = £1,000.
Tax at 40%
Basic rate deduction*
Tax liability on net rental income
This change can push some landlords, who are now basic rate, into the higher rate bracket.
A similar restriction applies to the cost of raising loan finance. For a copy of my spreadsheet comparing the position now with 2020/21 please give me a call.
How interest relief is given in your tax calculation.
For 2017/18 the relief is given partly by deduction, 75%, while the balance of 25% is granted by tax credit. This may cause confusion so an example is given below.
Rents receivable 20,000
Professional costs 1,000
Other expenses 500
Total expenses 10,000
Net profit £10,000
On your tax calculation the figure for “Profit from UK land and property” will be increased by 25% of the interest figure – £10,000 plus (£6,000 x 25%) £1,500 = £11,500 and this will form part of your “Total income received” on which tax is calculated. After arriving at a figure for “Income Tax charged” the 25% adjusted for above is then relieved by tax credit at the basic rate band – £1,500 x 20% = £300.
This method of calculation restricts interest relief for higher rate taxpayers.
Remember you cannot claim the capital element of your repayments. If there are other costs – finance costs, arrangement fees etc. these are allowable in the year of payment if incidental. Where they are significant, perhaps a £2,000 arrangement fee on a new fixed rate 5-year mortgage then claim over the term of the loan – £2,000/5 years = £400 pa.
If you increase your mortgage loan on your buy-to-let property you may be able to treat interest on the additional loan as a revenue expense, as long as the additional loan is wholly and exclusively for the purposes of the letting business.
Interest on any additional borrowing above the capital value of the property when it was brought into your letting business isn’t tax deductible.
Published 13 September 2017.
Updated 2 August 2018.