Tax relief for residential landlords: how it's worked out
See how to work out the tax relief for individual landlords and assess the impact of the finance cost restriction from 6 April 2017.
The tax relief that landlords of residential properties get for finance costs is being restricted to the basic rate of Income Tax. This is being phased in from 6 April 2017 and will be fully in place from 6 April 2020.
How the tax reduction is worked out
The reduction is the basic rate value (currently 20%) of the lower of:
- finance costs - costs not deducted from rental income in the tax year (this will be a proportion of finance costs for the transitional years) plus any finance costs brought forward
- property business profits - the profits of the property business in the tax year (after using any brought forward losses)
- adjusted total income - the income (after losses and reliefs, and excluding savings and dividends income) that exceeds your personal allowance
The tax reduction can’t be used to create a tax refund.
If the basic rate tax reduction is calculated using the ‘property business profits’ or ‘adjusted total income’ then the difference between that figure and ‘finance costs’ is carried forward to calculate the basic rate tax reduction in the following years.
You’ll still be able to deduct some of your finance costs when you work out your taxable property profits during the transitional period. These deductions will be gradually withdrawn and replaced with a basic rate relief tax reduction:
| Tax year | Percentage of finance costs deductible from rental income | Percentage of basic rate tax reduction |
|---|---|---|
| 2017 to 2018 | 75% | 25% |
| 2018 to 2019 | 50% | 50% |
| 2019 to 2020 | 25% | 75% |
| 2020 to 2021 | 0% | 100% |
Who can use the examples
The following examples will help you understand the impact of the changes on you as an individual landlord, if that’s your only source of rental income.
See the HMRC Property Manual for guidance on how partnerships or trusts are affected, or if you get income both as an individual and as the member of a partnership or the beneficiary of a trust.
You should also see the HMRC Property Manual for guidance and examples if you have finance costs from property which isn’t all residential (for example, a flat with a shop above it), as you’ll have to apportion the costs to find out how much can be deducted and how much has to be restricted.
To simplify the case studies, the Income Tax rates and Personal Allowances for the 2016 to 2017 tax year have been used throughout these examples. These are:
- Personal Allowance - up to £11,000
- basic rate - £11,001 to £43,000
- higher rate - £43,001 to £150,000
Example 1: impact before and after the restriction where there’s no increase in tax
Sophia is an individual with a yearly rental income from residential property of £52,000 as her only source of income.
Her mortgage interest is £20,000 per year.
Before restriction (2016 to 2017)
Property income calculation:
Rental income = £52,000
Finance costs = - £20,000
Other allowable expenses = - £9,000
Property profits = £23,000
Total income = £23,000
Income Tax calculation:
£11,000 x 0% = £0
£12,000 x 20% = £2,400
£0 x 40% = £0
Final Income Tax = £2,400
After restriction (2020 to 2021)
Property income calculation:
Rental income = £52,000
Finance costs (£20,000) = Nil deduction
Other allowable expenses = - £9,000
Property profits = £43,000
Total income = £43,000
Income Tax calculation:
£11,000 x 0% = £0
£32,000 x 20% = £6,400
£0 x 40% = £0
Less 20% tax reduction
for finance costs (£20,000 x 20%) -£4,000
Final Income Tax = £2,400
The tax reduction is calculated as 20% of the lower of:
- finance costs (100% of £20,000) = £20,000
- property profits = £43,000
- adjusted total income (exceeding Personal Allowance) = £32,000
The lowest amount is finance costs, so £20,000 x 20% = £4,000 tax reduction.
Sophia is one of the estimated 82% of landlords that don’t have any additional tax to pay because her total income, without a deduction for finance costs, doesn’t exceed the higher rate threshold.
Example 2: impact before and after the restriction where there’s an increase in tax
John’s an individual with self-employment income of £35,000 and rental income from residential property of £18,000 per annum.
His mortgage interest is £8,000 per year.
Before restriction (2016 to 2017)
Self-employment income = £35,000
Property income calculation:
Rental income = £18,000
Finance costs = - £8,000
Other allowable expenses = - £2,000
Property profits = £8,000
Total income = £43,000
Income Tax calculation:
£11,000 x 0% = £0
£32,000 x 20% = £6,400
£0 x 40% = £0
Final Income Tax = £6,400
After restriction (2020 to 2021)
Self-employment income = £35,000
Property income calculation:
Rental income = £18,000
Finance costs (£8,000) = nil deduction
Other allowable expenses = - £2,000
Property profits = £16,000
Total income = £51,000
Income Tax calculation:
£11,000 x 0% = £0
£32,000 x 20% = £6,400
£8,000 x 40% = £3,200
Less 20% tax reduction
for finance costs (£8,000 x 20%) -£1,600
Final Income Tax = £8,000
The tax reduction is calculated as 20% of the lower of:
- finance costs (100% of £8,000) = £8,000
- property profits = £16,000
- adjusted total income (exceeding Personal Allowance) = £40,000
The lowest amount is finance costs, so £8,000 x 20% = £1,600 tax reduction.
John becomes a higher rate taxpayer because of the change as his total income is more than the higher rate threshold of £43,000. John has an additional £1,600 tax to pay.
If John or his partner is claiming child benefit, he may have to pay a High Income Child Benefit Charge because his total income is now over £50,000.
Example 3: impact of first year of phased reduction of finance cost
The first tax year that relief for finance costs will be restricted is 2017 to 2018. This example shows the withdrawal of 25% of finance cost deduction and given as a basic rate tax reduction.
Jennifer has employment income of £25,000 and rental income from residential property of £11,000 per year. Her mortgage interest is £8,000 per year.
Salary before tax = £25,000
Property income calculation:
Rental income = £11,000
Finance costs (£8,000 x 75%) =
- £6,000
Other allowable expenses = - £500
Property profits = £4,500
Total income = £29,500
Income Tax calculation:
£11,000 x 0% = £0
£18,500 x 20% = £3,700
£0 x 40% = £0
Less 20% tax reduction for remaining finance
costs calculated on 25% of finance
costs (£8,000 x 25% = £2,000) x 20% -£400
Final Income Tax = £3,300
The tax reduction is calculated as 20% of the lower of:
- finance costs not deducted (25% of £8,000) = £2,000
- property profits = £4,500
- adjusted total income (exceeding Personal Allowance) = £18,500
The lowest amount is finance costs, so £2,000 x 20% = £400 tax reduction.
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.
Updates to this page
Published 20 July 2016Last updated 6 April 2017 + show all updates
-
This guidance has been updated to mention the finance cost restriction that starts on 6 April 2017.
-
First published.