Rental losses and the new restriction on finance costs

From 6 April 2017 the tax relief for loan interest and other finance expenses relating to let residential property will be restricted. How will this affect current and future losses from your buy-to-let property?

Controversial new rules

Since the new rules which will limit tax relief on interest and 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 rental losses will be affected.

Interest – old rules v new rules

Under the rules which apply until 6 April 2017 interest etc. counts as a deductible expense in the same way as any other. If your total expenses exceed your rental income it creates a loss, which is carried forward and used to reduce taxable rental profit (or increase a loss) for later years. From 6 April 2017 25% of interest etc. won’t count as an expense and so can’t be taken into account when working out a loss, but it can be carried forward and used in a different way.

Note. The portion of interest not allowed for 2018/19 increases to 50%, for 2019/20 to 75%, and for 2020/21 and later years, it’s 100%.

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 and 75% of the 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.

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 rental 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) and the 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.

Tax credit for interest etc. payments

Amy’s disallowed interest of £5,900 (which is the total of the amounts brought forward from 2017/18 and the 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:

  • 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 the result, so we’ll look at this in another article.

Any part of the disallowed interest that isn’t used to create a credit can be carried forward and used the next year.

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 and later years you’ll also need to report the amount of carried forward interest (if any), so it’s important to understand how the new rules work.


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