Restricted residential finance costs
Introduction
In tax year 2017-18, changes were introduced to restrict tax relief on residential property finance costs.
Some examples of finance costs which may be restricted include:
- Interest on a loan
- Any amount economically equivalent to interest (from the lender’s point of view)
- Incidental costs of obtaining finance, such as fees and commissions
Landlords will be able to obtain relief for residential property finance costs as follows:
| Tax year | Deduction from property income | Basic rate tax reduction |
|---|---|---|
| 2017-18 | 75% of finance costs | 25% of finance costs |
| 2018-19 | 50% of finance costs | 50% of finance costs |
| 2019-20 | 25% of finance costs | 75% of finance costs |
| 2020-21 onwards | 0% of finance costs | 100% of finance costs |
The changes affect income from let UK and overseas residential properties but not furnished holiday letting businesses, nor commercial property.
The Tax calculation report will include a basic rate tax reduction of the lower of:
- Finance costs not deducted from income
- Profits of the property business
- Adjusted total income
Any excess finance costs may be carried forward to the following tax years.
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.
Claiming restricted residential finance costs
For tax year 2017-18 onwards, 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.
The Main details tab for the relevant property will show the disallowed finance costs as per the table above.
The Residential finance costs of each property are aggregated by property business on the Land and property summary page. You can choose to reduce the amount claimed for the year, which populates the relevant box on the UK property or Foreign supplementary pages.