Interest on loans from residential property income

A new measure will restrict relief for finance costs.

This measure will restrict relief for finance costs on residential properties to the basic rate of income tax and will be introduced over four years from 6 April 2017.

The measure will not affect companies renting out property.

The measure will not affect individuals renting out commercial property or furnished holiday letting.

The measure will affect residential property in the UK and elsewhere.

The measure will affect mortgage interest, interest on loans to buy furnishings and fees incurred taking out or repaying mortgages or loans.

Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs.

Landlords will be able to obtain relief as follows:
Finance cost allowed in full                    Finance cost allowed at basic rate

Year to 5 April 2016                   100%                                                                  0%
Year to 5 April 2017                   100%                                                                  0%
Year to 5 April 2018                   75%                                                                 25%
Year to 5 April 2019                   50%                                                                 50%
Year to 5 April 2020                     25%                                                                75%
Year to 5 April 2021                      0%                                                               100%
The tax reduction is the basic rate value (20% for 2017/18) of the lower of:

  1. 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
  2. Property profits – the profits of the property business in the tax year (after using any brought-forward losses)
  3. Adjusted total income – the income (after losses and reliefs, and excluding savings and dividends income) that exceeds your personal allowance.

The tax reduction can’t be used to create a tax refund.

If the basic rate tax reduction is calculated using the ‘property profits’ or ‘adjusted total income’, then the difference between that figure and ‘finance costs’ is carried forward to calculate the basic rate tax reduction in the following years.

These changes were made by the Finance (No2) Act 2015 section 24, which effectively made amendments to:

  • Income Tax (Trading and Other Income) Act 2005 sections 272A and 272B introduced
  • Income Tax Act 2007 sections 399A and 399B introduced (relating to property partnerships).

No changes were made to corporation tax legislation relating to this matter.

You can see examples at ACCA’s UK technical advice and support pages.