Example of Property Income: Interest deduction

In 2017/18, if a landlord incurs loan costs on a let dwelling, the allowable deduction is only 75% of the cost. The remaining 25% gets tax relief at 20% in the income tax calculation.

  • This restriction does not apply to furnished holiday accommodation.
  • This also does not apply in case landlord is a company.
  • This applies only in case of residential property.

Example

Jack has employment income of £26,000 and rental income of £20,000. Costs are loan interest of £2,000 and other allowable expenses of £3,000.

£
Employment 26,000
Property £(20,000-(75% x 2,000) – 3,000 15,500
Personal allowance (11,500)
Taxable Income 30,000
Income Tax £30,000 x 20% 6,000
Less tax reducer £(2,000 x 25%x 20%) (100)
Income tax liability   5,900

Apologies, I lifted this straight out of ICAEW Vital magazine. I could not resist seeing such a simple and beautiful example.

Conclusion:

Basically, this change effects only tax payers whose total income goes over higher rate threshold (i.e. £46,351 for the tax year 2017-18) without deducting finance cost.

Example 1 : John has salary income of £30k and rental income of £15k and finance cost of £10k. John’s total income without deducting finance cost is £45k , this is below £46,351 thus no effect for John.

Example 2  : Jane has salary income of £30k and rental income of £25k and finance cost of £10k. John’s total income without deducting finance cost is £55k , this is above £46,351 thus this will effect Jane.

To learn how it will effect, see HMRC guidance.

Bonus fact:

  1. HMRC guidance mentions 82% of landlord will not be effected as their total income, without a deduction for finance costs, does not exceed the higher rate threshold.
  2. In tax year 2016-17, out of UK adult population of 53.2 million , c 30.2 million were tax payers (57% of adult population). Around 4.4 million (8%) were paying tax at 40% and 333k (0.6%) tax payers are in 45% tax bracket. Click here for Source.
  3. As per BBC article date June 2017. There are 15k individuals with incomes over £1m and 4k over £2m.

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