Restricted residential finance costs

From 2017-18, changes have been introduced to restrict tax relief on residential property finance costs.

What are finance costs?

Interest on a loan
Any amount economically equivalent to interest (from the lender’s point of view)
Incidental costs of obtaining finance
Fees, commissions, advertising, printing or other incidental matters incurred wholly and exclusively for the purpose of:
- Obtaining loan finance
- Providing security for finance
- Repaying finance

Excludes stamp duty, foreign exchange losses, costs of repayment of a loan at a premium or if obtained at a discount.

Background legislation on relief for residential property finance

Landlords will be able to obtain relief for residential property finance costs as follows:

In 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 deduction
In 2018-19, the deduction from property income is restricted to 50% of finance costs, with the remaining 50% being available as a basic rate tax deduction
In 2019-20, the deduction from property income is restricted to 25% of finance costs, with the remaining 75% being available as a basic rate tax deduction
In 2020-21, all finance costs incurred by a landlord will be given as a basic rate tax deduction.

The changes affect income from let UK and overseas residential properties but not furnished holiday letting businesses, nor commercial property.

This tax reduction will be calculated as the lower of:

a – 20% of the finance costs not deducted from income in the tax year (or, in the case of a partnership, the individual’s share of that amount) plus any unrelieved amount brought forward from the previous year;

b – 20% of profits of the property business in the tax year (or, in the case of a partnership, the individual’s share of them), net of any losses brought forward; or

c – 20% of the persons total non-savings (including dividend) income that exceeds their personal allowance (and where applicable the blind person’s allowance) in the tax year.

Any excess finance costs may be carried forward to following years 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 loss. 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. Any excess can be carried forward.

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.

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.