Summary of the changesThe changes affect income from let UK and overseas residential properties but not furnished holiday letting businesses, nor commercial property. Landlords will be able to obtain relief for residential property finance costs as follows: | Tax year | Changes to the restriction of finance cost relief |
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| 2016-17 | There are no changes as this restriction only took effect from 6 April 2017 | | 2017-18 | The deduction from property income is restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction | | 2018-19 | 50% of finance costs deduction and 50% given as a basic rate tax reduction | | 2019-20 | 25% of finance costs deduction and 75% given as a basic rate tax reduction | | 2020-21 and beyond | All financing costs incurred by a landlord will be given as a basic rate tax reduction |
Source: .GOV.UK website Claiming restricted residential finance costsFor 2017-18 and subsequent years, the Expenses tabs at Furnished lettings, Unfurnished lettings, and Foreign property include a row for Restricted residential finance costs. You should use this row to enter the total finance costs incurred which are subject to the relief restriction.  NOTE: Finance costs entered against other rows will be treated as standard (unrestricted) expenses.
The Main details tab for the relevant property will show a figure of disallowed finance costs. For 2017-18, this will be equal to 25% of the amount entered on the restricted residential finance costs row. The disallowed amount will be used as the basis of a tax reduction, which will appear on the Tax calculation. You can further analyse the Residential finance costs by selecting Tax return and computations, Land and property summary, where you can enter any amount brought forward (for 2018-19 and later years) and can reduce the amount used this year, if appropriate. The legislation imposes restrictions on claims for cash basis, property allowance and finance costs. You will need to determine which claims are relevant to your clients.
Frequently Asked QuestionsHow is this tax reduction calculated?One of the most common questions we get asked is how is the tax reduction calculated, or why is the relief being restricted? The reduction is the basic rate value (20%) of the lower of:
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| Description |
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| (a) | 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 |
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| (b) | Property business profits | Profits of the property business (or the individual's share of profits if it's a partnership) in the tax year (after using any brought forward losses) |
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| (c) | Adjusted total income | Income (after losses and reliefs, and excluding savings and dividends income) that exceeds your personal allowance |
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Source: .GOV.UK website Any excess finance costs may be carried forward to the following year if the tax reduction has been limited to 20% of the profits of the property business in the tax year. The tax reduction applies to each property business and cannot create a tax refund. An ‘excess’ tax reduction on an overseas property business cannot be used against a UK property business or share of partnership property business and vice versa. If the amount on which relief is available is less than the total in (a) above (i.e. because it is limited by (b) and/or (c) above), the unrelieved amount is carried forward and included in (a) in the following tax year. NOTE: You can find details of any restriction on the tax calculation (usually page 2 or 3) - e.g. the adjusted total income is nil. Where there is more than one residential property business, the actual amount on which the reduction is based is apportioned between the businesses by reference to the lower of (a) and (b) above for each business. Will this restriction affect other parts of the tax calculation?This depends on your client's circumstances, but as there is potentially more taxable income that may place your client in a different rate or band, it could affect: - Personal allowance
- Marriage allowance
- Personal savings allowance
- Annual pensions allowance
- High Income Child Benefit Charge (HICBC)
- Capital Gains Tax
- Student Loan repayments
Why is the amount used this year carried forward?When reviewing the Land and Property summary where you have an amount against Amount used this year you may find that the tax calculation shows this being carried forward rather than utilised this year. One reason for this is because the adjusted total income may be nil (for example, the other income is covered by reliefs or personal allowances) and therefore restricted by (c) above. The restriction is only applied on the tax return and calculation whereas the land and property summary shows the potential amount available. NOTE: Please review the Property Finance costs section of the calculation (usually page 2 onwards) to find out why the relief is restricted More information here.
Does this only affect higher / additional rate taxpayers?This restriction applies to individuals that receive rental income on residential property in the UK or elsewhere and incur finance costs (such as mortgage interest), excluding where the property meets all the criteria to be a furnished holiday letting. Source: .GOV.UK website This means the restriction also applies to clients who are in the basic rate band. Any relief that is due will be given on income in the basic rate band (even if the client is a higher or additional rate taxpayer) For a basic rate scenario, please see the example on the .GOV.UK website for further information
Why isn't the unused amount rolling forward?Where you have an Amount to carry forward and have updated to the following year, you may notice that this amount isn't brought forward from the prior year. You'll need to have a finalised return with the carried forward figure in the prior year for it to be brought forward. If you've year updated without having a finalised return, you'll need to do one of the following: - Year update the client again. This will overwrite all sections for the client in the new year
- Right-click on one of the properties in the earlier year and select Section update. This will only overwrite the details for that property in the later year
- In the later year, select Tax return and computations, Land and property summary and enter the amount brought forward manually.
See Why isn't unused residential finance cost relief automatically carried forward? for more details
How do I enter restricted finance costs brought forward from an earlier year?You can enter any brought forward amounts on to the Land and property summary page under 'Residential finance costs' Amount brought forward. Please bear in mind that restricted residential finance costs were introduced from 6 April 2017 so you'll only be able to enter a brought forward amount for 2018-19 and later years.
Partnerships and TrustsRestricted finance costs from a partnershipThe restriction for finance costs from partnership property income will have been dealt with on the partnership return (e.g. box 1.40 on the SA801 or 26 and 27 on page 7 of the SA800 (Full) pages) If your figures haven't been posted from Sage Partnership Tax, you'll need to enter the restricted amount rather than the total under Earned income, Partnerships on the Tax adjustments tab in either the UK or Foreign column. For more information on restricted finance costs for partnerships please see Restricted finance costs - Partnerships
Restricted finance costs from a trust Both Beneficiaries and Settlors sections have been updated to include restricted finance costs. Similarly to partnerships, you'll need to enter the restricted amount rather than the total. Further informationFor more information on this restriction, along with some case studies, please visit HMRC's website. You can find details of the legislation behind this change in s24 Finance (No. 2) Act 2015.
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