It’s the dreaded Clause 24 Interest Rate Restriction being phase in as noted below
2018/19 50% of the interest can be claimed in full and 50% will get relief at 20%
2019/20 25% of the interest can be claimed in full and 75% will get relief at 20%
2020/21 100% will get only 20% relief
Investors with residential property will probably have noticed boxes 45 and 45a
45 Unused residential finance costs brought forward
45a Unused residential finance costs carried forward
This is how HMRC explain these figures
Example 4: carrying forward unused finance costs
In the tax year 2020 to 2021 Brian’s annual salary before tax is £36,000 and his rental income is £20,000. The property was empty for 2 months while he found a new tenant and during that time he carried out some repairs on the property.
Brian’s mortgage interest was £15,000 and he had other allowable expenses of £7,000 due to the repairs he carried out.
Tax year 2020 to 2021
Salary before tax = £36,000
Property income calculation:
Rental income = £20,000
Allowable non-finance costs = – £7,000
Property profits = £13,000
Total income = £49,000
Income Tax calculation:
£11,000 x 0% = £0
£32,000 x 20% = £6,400
£6,000 x 40% = £2,400
Finance cost tax reduction calculated
on property profits (£13,000 x 20%) -£2,600
Final Income Tax = £6,200
Brian’s tax reduction is calculated as 20% of the lower of:
finance costs = £15,000
property profits = £13,000
adjusted total income (exceeding personal allowance) = £38,000
The lowest figure is property profits, so £13,000 x 20% = £2,600 tax reduction.
The £2,000 finance costs (£15,000 – £13,000) that haven’t been used to calculate his basic rate tax reduction are carried forward to calculate his basic rate tax reduction in the following year.
In the tax year 2021 to 2022, Brian’s salary is £36,000 and his rental income is £24,000. His mortgage interest is still £15,000 and he has other allowable expenses of £2,000.
Tax year 2021 to 2022
Salary before tax = £36,000
Property income calculation:
Rental income = £24,000
Allowable non-finance costs = – £2,000
Property profits = £22,000
Total income = £58,000
Income Tax calculation:
£11,000 x 0% = £0
£32,000 x 20% = £6,400
£15,000 x 40% = £6,000
Finance cost tax reduction calculated
on finance costs (£17,000 x 20%) -£3,400
Final Income Tax = £9,000
Brian’s tax reduction is calculated as 20% of the lower of:
finance costs (£15,000 of the current year and £2,000 brought forward) = £17,000
property profits = £22,000
adjusted total income (exceeding personal allowance) = £47,000
The lowest amount this year is finance costs, so £17,000 x 20% = £3,400 tax reduction.
