What are Unused Residential Finance Costs? Box 45 and 45a Reply

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

https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies#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.

 

steve@bicknells.net

Useful facts about Clause 24 – Restricting Landlords Interest Relief Reply

From April 2017 the Government introduced a new restriction on claim mortgage interest as a cost against residential property letting.

Its being phased in

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

The rules don’t apply to

  • Companies
  • Furnished Holiday Lets (which will include Serviced Accommodation if they meet the FHL criteria)
  • Property Development and Trading
  • Commercial Property in a mixed use building

The rules do apply to

  • BTL’s
  • HMO’s
  • Partnerships including LLP’s
  • Individual Landlords
  • Trustees

What loans will it apply to

  • Loans taken out to buy residential property for letting
  • Existing loans and mortgages of a residential landlord
  • Loans taken out to purchase an interest in a property letting partnership

What costs are within the scope of clause 24

  • Interest
  • Finance Costs
  • Incidental costs such as broker fees and loan related legal costs

How much difference does having a residential investment company make to a higher rate tax payer?

steve@bicknells.net

Rising rents and clause 24 Reply

On the 28th February 2018, MSN and the Daily Mail reported

Experts warn of buy-to-let crunch as landlords sell off unprofitable properties and hike rents

David Cox, ARLA Propertymark chief executive, said it pointed to ‘a rough ride’ for renters in 2018.
‘Housing stock is falling as rising taxes continue to force established landlords out of the market and deter entry into the sector,’ he said.
‘And the volume of renters is increasing as the cost of buying a home is moving further out of reach for many. The fact that one in five tenants is experiencing rent increases is just another blow.
‘Ultimately, until the prospect of investing in the buy-to-let market is more attractive for prospective landlords, and stock subsequently increases, tenants will continue to feel the burn.’

We have known for some time that Landlords have been hit hard by recent tax changes:

  • Clause 24 restricting relief for interest
  • 8% extra capital gains tax
  • 3% extra stamp duty

https://stevejbicknell.com/2018/01/29/how-much-extra-tax-do-property-investors-pay/

We also know that Companies are a better way to invest in property for most investors because

  • Clause 24 doesn’t apply
  • The extra 8% capital gains tax doesn’t apply to Share Sales
  • The stamp duty on shares is 0.5%

It hardly surprising that individual property investors will be increasing rent to cover the extra taxes.

Some landlords with high levels of borrowing will definitely start selling off properties to avoid clause 24, which will lead to some landlords becoming insolvent.

https://stevejbicknell.com/2017/09/18/how-will-clause-24-affect-you/

But for those Landlords investing via Companies, the higher rents will lead to enhanced profits.

steve@bicknells.net

 

 

How will Clause 24 affect you? 1

Clause 24 of the Finance Bill sets out restrictions for individuals on claiming mortgage interest as a cost against their property investment income, for individuals it will work as follows

2017/18 75% of the interest can be claimed in full and 25% will get relief at 20%

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

These rules will not apply to Companies, Companies will continue to claim full relief.

The rules also don’t apply to Furnished Holiday Lets.

Essentially Section 24 removes Interest from the property expenses and gives you tax relief at 20% (basic rate). So Higher rate tax payers will pay more tax.

The Mortgage Works have a spreadsheet calculator that demonstrates this and also incorporates other profits and income.

www.themortgageworks.co.uk/includes/xls/T1036_Tax_Change_Calculator.xlsx

steve@bicknells.net