Tax relief for residential landlords (Section 24 of the Finance (no.2) Act 2015): how it’s worked out

Tax relief for residential landlords: how it’s worked out

As well publicised, the tax relief that landlords of residential properties can claim for *finance costs is now being restricted to the basic rate of income tax.  This is being phased in from 6 April 2017 and will be fully implemented from 6 April 2020.

*finance costs include mortgage interest and fees incurred when taking out or repaying loans. 

The tax reduction is calculated as the basic rate value (currently 20%) of the lower of:

• Finance costs (costs not deducted from the rental income in the tax year, plus any finance costs brought forward)

• Property business profits (after offsetting any brought forward losses)

• Adjusted total income (income, after losses and reliefs, excluding savings and dividend income, that exceeds the personal allowance)

Where the tax deduction is calculated using the ‘property business profits’ or ‘adjusted total income’, then the difference between that figure and ‘finance costs’ is carried forward when calculating the relevant tax deduction in the following years.


Worked example (using income tax rates and allowances for 2016/17):

Before restriction (2016/17)

Self-employed income            £35,000

Property income calculation:

 

Rental income     £18,000
Finance costs  (8,000)
Other expenses    (2,000)
Property profits            £8,000
Total income      £43,000 

 

Income tax calculation:

 11,000 x 0%          0
 32,000 x 20%       6,400
 0 x 40%  0
 Income tax due   6,400   

  

Income tax due

Self-employed income                                                       £35,000

Property income calculation:

 

 Property income calculation: £18,000
 Finance costs (£8,000)     nil deduction
 Other expenses                (2,000)
 Property profits                 £16,000
 Total income       £51,000

 

Income tax calculation:

 11,000 x 0%           0
 32,000 x 20%        6,400
 8,000 x 40%  3,200   

Less 20% tax reduction

Finance costs (£8,000 x 20%)      
(1,600)          

 Income tax due 

£8,000

The tax deduction is calculated as 20% of the lower of:

  • Finance costs = £8,000
  • Property business profits = £16,000
  • Adjusted total income = £40,000The lowest amount is finance costs of £8,000 x 20% = £1,600

 

Ward Williams has a team that specialises in the needs of landlords. To find out more please visit our Property section

If you wish to discuss the above, please contact Simon Boxall at simon.boxall@wardwilliams.co.uk

About the author

Simon is the Tax Director at Ward Williams and has more than 20 years of practical experience working in the tax profession.

 

Specialising in personal tax, Simon qualified as a Tax Technician in 2007, having been awarded with the Ivison medal for attaining the highest mark in the Personal Taxation paper in 2006.

 

As department head, Simon oversees the tax team across the Ward Williams group, whilst managing a diverse portfolio of clients including high net worth individuals, doctors, directors of owner managed businesses, partnerships and sole traders.

simon.boxall@wardwilliams.co.uk

01895 236335