Residential property income interest relief

Residential property income interest reliefย guidelines have been issued by the government.

Residential properties

The new guidance guidance features examples on theย restriction of income tax relief for interest costs incurred by landlords of residential properties.

According to Stockport accountants, IN Accountancy, the ย rules, which will be phased in from April 2017, only apply to residential properties and do not apply to companies or furnished holiday lettings.

Income tax relief

From April 2017 income tax relief will start to be restricted to the basic rate of tax. The restriction will be phased in over four years and therefore be fully in place by 2020/21. In the first year the restriction will apply to 25% of the interest, then 50% the year after and 75% in the third.

The restriction may result in additional amounts of tax being due but will depend on the marginal rate of tax for the taxpayer. Basic rate taxpayers should not be substantively affected by these rules. A higher rate taxpayer will, in principle, get 20% less relief for finance costs. However the calculation method may mean that some taxpayers move into the higher rate tax brackets as the following example illustrates:

Consider the 2020/21 tax year when the transitional period is over. Assume that the personal allowance is ยฃ11,000, the basic rate band ยฃ32,000 and the higher rate band starts at ยฃ43,000.

Assume Ellisha has a salary of ยฃ28,000, rental income before interest of ยฃ23,000 and interest on the property mortgage of ยฃ8,000. Under the current tax rules, taxable rental income is ยฃ15,000. She will not pay higher rate tax as her total income is ยฃ43,000 – the point from which higher rate tax is payable.

With the new rules, taxable rental income is ยฃ23,000. So ยฃ8,000 is taxable at 40% – ยฃ3,200. Interest relief is given after having computed the tax liability on her income. The relief is ยฃ8,000 at 20% – ยฃ1,600. So an extra ยฃ1,600 tax is payable.

Tax refunds

It should be noted that the tax reduction cannot be used to create a tax refund.ย So the amount of interest relief is restricted where either total property income or total taxable income (excluding savings and dividend income) of the landlord is lower than the finance costs incurred. The unrelieved interest is carried forward and may get tax relief in a later year.

Child benefit is clawed back if โ€˜adjusted net incomeโ€™ is above ยฃ50,000. Interest will not be deductible in the calculation of โ€˜adjusted net incomeโ€™.

The personal allowance is reduced if โ€˜adjusted net incomeโ€™ is above ยฃ100,000.

Please contact [email protected]ย if you would like advice on how these rules will affect you.

Let’s start a conversationย 

    Subscribe me for updates and news from In Accountancy

    Related articles

    Find out how we can help?

    Lectus scelerisque a donec tincidunt litora per eleifend eget ut sagittis conubia pharetra scelerisque dui ultricies duis parturient auctor adipiscing.

    ย 

    Let’s start a conversationย 

      Subscribe me for updates and news from In Accountancy

      In Accountancy Logo

      IN-ACCOUNTANCY

      Search
      IN-Accountancy
      Privacy Overview

      This website uses cookies so that we can provide you with the best user experience possible. Cookie information is stored in your browser and performs functions such as recognising you when you return to our website and helping our team to understand which sections of the website you find most interesting and useful.