This is often referred to clause 24 or section 24 relating to Finance Act 2015 (No 2) [Section 26 Finance Act 2016] that introduced the change which started from 6th April 2017. It took full force for the tax year 2020/21. The rules restrict interest relief to the basic rate of tax (20%).
The legislation was inserted into Income Tax (Trading and Other Income) Act 2005: Sections 272A, 272B and 274A-274C and Income Tax Act 2007: Sections 399A and 399B.
The legislation does not apply to Furnished Holiday Lets or Limited Companies.
Finance Costs include all finance costs, even those to buy furnishings and the incidental cost of arranging the finance.
The Relief
Its calculated as 20% of the lower of
- Finance costs not deducted from income, or
- The profits of the property business, or
- The adjusted total income
What is adjusted Total Income?
Net income is defined in the Income Tax Act 2007 Section 23
23 The calculation of income tax liability
To find the liability of a person (“the taxpayer”) to income tax for a tax year, take the following steps. Step 1
Identify the amounts of income on which the taxpayer is charged to income tax for the tax year.
The sum of those amounts is “total income”.
Each of those amounts is a “component” of total income.
Step 2
Deduct from the components the amount of any relief under a provision listed in relation to the taxpayer in section 24 to which the taxpayer is entitled for the tax year.
See [F1sections 24A and 25] for further provision about the deduction of those reliefs.
The sum of the amounts of the components left after this step is “net income”.
It excludes Saving and Dividend Income (ITA07/S18 (3) & (4)).
It excludes the personal allowance and blind persons allowance (ITA07/S23).
The end results is adjusted total income (ATI) – S274AA.
A tax reduction can not be used to create a tax refund but it can be carried forward.
Example 2020-21 onwards
Fred has
- Employment Income £45,000
- Residential Property Income £25,000
- Mortgage Interest £10,000
- Allowable expenses £5,000
- Property Losses Carried Forward £15,500
- Unused Finance Costs carried forward from 2019-20 £2,000
Calculation as follows
| Employment Income | £45,000 |
| Property Income Calculation | |
| Rental Income | £25,000 |
| Finance Costs – you can’t deduct Mortgage Interest | £0 |
| Allowable Expenses | -£5,000 |
| Property Business Profits | £20,000 |
| Less Property Losses Carried Forward | -£15,500 |
| Taxable Property Business Profits | £4,500 |
| Net Income – Employment and Property | £49,500 |
| Income Tax Calculation | |
| Personal Allowance £12,500 at 0% | |
| Basic Rate £37,000 at 20% | £7,400 |
| Higher Rate £0 at 40% | |
| Income Tax Liability before Residential allowance | £7,400 |
The Basic Rate Tax 20% reduction for Residential Property is the lower of
- Finance Costs not deducted in this case that’s £10,000 Mortgage and £2,000 Unused Finance Costs carried forward from 2019-20 which totals £12,000
- Property business profits which are £4,500
- Adjusted total income (exceeding personal allowance) £37,000 (£49,500 – £12,500)
The lowest amount is the
So the basic rate tax reduction is 20% x £4,500 = £900
We can now deduct that from the £7,400, leaving £6,500 as the final income tax liability.
| Unused Finance Costs | ||
| Residential Finance Costs | £12,000 | |
| Used in the Basic Rate Reduction | -£4,500 | |
| Unused Residential Finance Costs | £7,500 |
The Unused Residential Finance Cost is carried forward to the next tax year, in this example 2021-22.
We repeat the calculations above in 2021-22, following all the same steps.
Let’s assume in 2021-22 his net income from Employment and Property is £60,000
The tax would be 0% x £12,570 plus 20% x £37,700 plus 40% x £9,730 = £11,432
The Basic Rate Tax 20% reduction for Residential Property is the lower of
The lowest is £17,500.
So the basic rate deduction is £17,500 x 20% = £3,500
£11,432 less £3,500 gives a final income tax liability of £7,932
| Unused Finance Costs | |
| Residential Finance Costs and carried forward amount | £17,500 |
| Used in Basic Rate Reduction | -£17,500 |
| Unused Residential Finance Costs to be Carried Forward | £0 |
