Personal landlords with mortgages or loans on residential lets will be aware of the restriction on the amount of tax credit relief that can be claimed on interest paid. Usually, this amount is 20% of the interest paid in any one year. However, there are circumstances where a further restriction (a ‘cap’) may apply. The ‘cap’ is 20% of the lower of the:
- interest claimable in the tax year
- profits of the business for the tax year; and
- the landlord’s adjusted total income (after losses and reliefs but excluding savings and dividend income) that exceeds the personal allowance for them
Although ‘capped’ the interest relief is not entirely lost as any amount not utilized in one year is carried forward and added to the loan interest figure of the following year.
Alan is employed and earns £15,000 a year. He rents out a residential property at an annual gross rent of £20,000 with expenses of £3,800 creating a profit of £16,200. Mortgage interest of £6,000 has been paid and there was a loss brought forward of £(4,000). There is also an amount of £7,500 interest that was unable to be utilized in the previous year and has been brought forward to be included in the interest calculation for the current tax year.
The amount available as a tax credit is ‘capped’ at the lower of:
- interest – 20% of £13,500 (£6,000 + £7,500) = £2,700;
- property profits – 20% of £12,200 (£16,200 – £(4,000)) = £2,440;
- adjusted taxable income – 20% of £27,200 (£15,000 + £16,200 – (£4,000) – £12,570) = £2,926.
Therefore, the amount of tax credit claimable for loan interest relief is £2,440 with the balance of unrelieved finance costs of £1,300 (£13,500 – £12,200) available to be carried forward to the next tax year. Should the amount of tax credit reduction be calculated to be less than the tax liability, then the tax liability is reduced to nil as a tax credit cannot create a tax refund.
These rules do not apply to furnished holiday lets as the profits on such lets are treated as a business and as such interest payments are allowable in full. They also do not affect landlords with commercial properties or those properties held within a company structure.