How to carry forward the unrestricted property finance cost

The tax relief that landlords of residential properties get for finance costs has been capped and restricted to the basic rate of Income Tax from 6th April 2017.

This means the first self assessment tax return (SA) that will be available to be filed after the introduction of this restriction is 2017/2018, which needs filing on or before 31 Jan 2019. This is being phased in from 6 April 2017 and will be fully in place from 6 April 2020 with 0% restriction

How the tax reduction is worked out

The reduction is the basic rate value (currently 20%) of the lower of:

finance costs - costs not deducted from rental income in the tax year (this will be a proportion of finance costs for the transitional years) plus any finance costs brought forward
property business profits - the profits of the property business in the tax year (after using any brought forward losses)
adjusted total income - the income (after losses and reliefs, and excluding savings and dividends income) that exceeds your personal allowance

Box 26 - Property Expenses

For the 2017 to 2018 tax year, you can only claim 75% of the cost of getting a loan, or alternative finance to buy a residential property that you let, and 75% of any interest on such a loan or alternative finance payments.

For example if you incurred £4,000 in interest on such a loan:

enter £3,000 (75% of £4,000) here
enter £1,000 (25% of £4,000 in ‘Residential finance costs not included in Loan interest and other financial costs’. This will be used to calculate a reduction in your income tax

Box 44 - Residential finance costs not included

Enter the remaining 25% of residential property finance costs which you didn’t include in box 26, this amount will be used to calculate a reduction in your income tax

Worked Example for 2017/2018

Assume Mrs D has employment income of £593 and rental income of £11,400 with rental expenses of £7,658. Also assume that the full finance cost is £3,730 is already included in the expenses mentioned. Accordingly, only £2,798 (75% 3,731) has to be declared in box 26 of the return, whilst the balance £933.00 ( 25% of £3,731) being shown in box 44.

In Mrs D's case, as her total taxable income is less than the personal allowance, there is no tax due and as a result, there is no 20% tax relief given on the restricted finance cost (£933.00) as well (i.e 25% of £3,731)

If Mrs D had a property loss of assume £3,500 rather than a profit of £3,742, this restricted finance cost of £933 could have been carried forward to 2018/2019 to be utilized and relieved against tax due in that year together with the restricted finance cost of that year.

For more informaion about restricted and unrestricted property finance cost, contact MGT Chartered Accountants for a personalised illustration.