Deduction for interest costs
The method of giving landlords relief for interest and other financing costs is gradually switching from one by deduction to one as a basic rate tax reduction. Once fully implemented, relief will only be available at the basic rate, regardless of the landlord’s marginal rate of tax.
The transitional period lasts four years, with 2017/18 being the first year. It is important that landlords comply with the new rules and claim relief for interests costs correctly when completing their 2017/18 tax return.
The transitional period
The change from relief by deduction to relief as a basic rate reduction is being introduced gradually.
- For 2017/18, 75% of interest cost are allowed as a deduction, with relief for the remaining 25% as a basic rate tax deduction.
- For 2018/19, 50% of the interest costs are allowed as a deduction, with relief for the remaining 50% as a basic rate tax deduction.
- For 2019/20, 25% of the interest costs are allowed as a deduction, with relief for the remaining 75% as basic rate tax deduction.
- For 2020/21 and subsequent tax years, relief for 100% of interest costs is given as a basic rate tax deduction.
Relief by deduction
Interest costs qualifying for relief by deduction are simply deducted as for any other deductible expense from rental income in computing taxable rental profits.
Relief as a basic rate tax deduction
Where relief is given as a basic rate tax reduction, the amount of tax that is payable is reduced by an amount that is equal to the basic rate tax multiplied by the interest costs which qualify for relief as a basic rate tax deduction.
Assume a landlord has interest costs of £1,000 in each of the years from 2017/18 to 2020/21 inclusive, the amount they can deduct in calculating their profits and the amount by which the tax bill is reduced is shown below. It is assumed that the basic rate of tax remains at 20% throughout.
|Tax year||Deduction in computing profits||Tax reduction at basic rate|
|2017/18||£750||£50 (£250 @ 20%)|
|2018/19||£500||£100 (£500 @ 20%)|
|2019/20||£250||£150 (£750 @ 20%)|
|2020/21||0||£200 (£1,000 @ 20%)|
If the landlord is a higher rate tax payer, the relief will gradually be reduced as the method of giving relief switches from deduction (where relief is at the higher rate) to relief as a basic rate tax deduction (where relief is given only at the basic rate).
Relief is claimed via the property pages of the self-assessment tax return. If a breakdown of expenses is provided, the interest costs qualifying for relief by deduction (75% of total interest costs for 2017/18) are entered in the relevant box on p.2 of the property income pages in the box headed ‘Loan interest and other financial costs’. The balance for which relief is given as a basic rate reduction is entered in the box on p.4 of the property income pages, headed ‘Residential finance costs not included’ in ‘loan interest and other financial costs’.
It is important that the tax return is completed correctly so that relief is given in the right way.
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