#### Controversial *new* rules

*new*

Since *the** new* rules which will limit tax relief on interest

*finance costs for landlords of residential properties were announced in 2015, they’ve been a source of controversy, largely because they are unusually tricky to understand. One point which seems to cause a lot of confusion is how property*

*and*

*rental**will be affected.*

*losses*#### Interest – old rules v *new* rules

*new*

Under * the* rules which apply until 6 April 2017 interest etc. counts as a deductible expense in

*same way as any other. If your total expenses exceed your*

*the**income it creates a loss, which is carried forward*

*rental**used to reduce taxable*

*and**profit (or increase a loss) for later years. From 6 April 2017 25% of interest etc. won’t count as an expense*

*rental**so can’t be taken into account when working out a loss, but it can be carried forward*

*and**used in a different way.*

*and***Note.** * The* portion of interest not allowed for 2018/19 increases to 50%, for 2019/20 to 75%,

*for 2020/21*

*and**later years, it’s 100%.*

*and***Example 1.** In 2017/18 Amy receives £9,600 rent from a flat she bought in April 2017. Her expenses are £4,000, plus mortgage interest of £8,000. To arrive at her taxable profit she can deduct * the* £4,000

*75% of*

*and**mortgage interest (£6,000).*

*the**result is a loss of £400 which can be carried forward.*

*The**disallowed interest of £2,000 can also be carried forward, but not as a loss; it is instead added to*

*The**interest paid in*

*the**next year.*

*the***Example 2.** In 2018/19 Amy received rent of £10,000. Her expenses are £3,800, plus mortgage interest of £7,800. In 2018/19 * the* proportion of interest which can’t be claimed as an expense is 50%. This means Amy’s

*income profit is £1,900, i.e. income £10,000 less: expenses of £3,800, mortgage interest of £3,900 (being 50% of £7,800)*

*rental*

*and**loss brought forward of £400. She also has brought forward interest of £2,000. This is added to*

*the**disallowed interest for 2018/19 of £3,900. It’s here that things start to get tricky.*

*the*#### Tax credit for interest etc. payments

Amy’s disallowed interest of £5,900 (which is * the* total of

*amounts brought forward from 2017/18*

*the*

*and**amount disallowed for 2018/19) is used to create a tax credit, which is knocked off her general tax liability.*

*the**maximum credit is*

*The**basic tax rate (20%) multiplied by*

*the**interest, i.e. £1,180 (£5,900 x 20%), but further restrictions can apply. These limit*

*the**tax credit to*

*the**lower of 20% of*

*the**:*

*the*- disallowed finance costs, in Amy’s case that’s 20% of £5,900
- property profits, i.e. for Amy that’s 20% of £1,900;
*and* - adjusted total income. We haven’t given figures in our examples to work this out for Amy – there are too many variables which can affect
result, so we’ll look at this in another article.*the*

Any part of * the* disallowed interest that isn’t used to create a credit can be carried forward

*used*

*and**next year.*

*the***Tip.** While you should already be keeping a record of * losses* carried forward because they must be declared on your tax return, for 2017/18

*later years you’ll also need to report*

*and**amount of carried forward interest (if any), so it’s important to understand how*

*the*

*the**rules work.*

*new*

*Reproduced with the permission of Indicator – FL Memo Limited. For subscription information call 01233 653500;*