How Landlords Claim Relief For Excess Interest

Interest relief for residential landlords is not as straightforward as it used to be.

If you run an unincorporated property business and have mortgage interest or other finance costs relating to residential lets, relief is normally given as a basic rate tax reduction.

That tax reduction is calculated at 20%.

But there is an important catch. You may not always get relief for the full amount in the year the interest is paid.

How the tax reduction works

The tax reduction is based on 20% of the lowest of three figures:

The interest and finance costs for the year.

The profits of the property business after any brought-forward losses.

Your adjusted total income above the personal allowance.

This means the tax reduction cannot create a tax refund.

If your property profits are too low, or your adjusted income is too low, some of the interest may not be relieved in that tax year.

What happens to unused interest relief?

If the full amount cannot be relieved, the unused finance costs are carried forward.

They may then be used in a later year, provided there are sufficient profits and income to support the claim.

This is easily missed.

A landlord may look at their mortgage interest, assume they have received relief, and not realise that some of it has been carried forward rather than used.

Example

Suppose a landlord pays mortgage interest of £10,000 in a year.

If the property business only makes a profit of £8,000, the tax reduction is restricted to 20% of £8,000.

That gives relief of £1,600.

The remaining £2,000 of interest is not lost. It is carried forward and may be relieved in a later year if the conditions are met.

If the next year’s profits are higher, the landlord may be able to claim relief for both the current year’s interest and the amount brought forward.

Why this matters

With higher interest rates, more landlords are seeing finance costs eat heavily into their rental profits.

That means restrictions and carried-forward amounts are becoming more common.

If the figures are not tracked properly, landlords could miss out on relief they are entitled to in later years.

The key point

Excess interest relief can be valuable, but it needs to be monitored.

You need to know what has been claimed, what has been restricted, and what has been carried forward.

At williams lester accountants, we help landlords keep track of the numbers, claim the relief properly and avoid losing sight of valuable tax reductions.