PROPERTY - 02.03.2017

Another sting in the tail for landlords

How much relief?

In January 2017 we explained the fiddly calculations some landlords will have to make for 2017/18 and later years in respect of interest and other finance costs ( yr.17, iss.8 pg.6 , see The next step ). But there’s one part of the equation that we left out as it needs explaining in more detail; namely how your other income and outgoings can affect the amount of tax relief you’ll receive.

Multiple choice tax credit

After working out the interest etc. for which you can receive relief, you need to calculate what it’s worth in terms of a tax credit. The new rules say that this is the lower of 20% of:

• the disallowed finance costs
• the property profits; and
• your “adjusted total income”.

The first two calculations are fairly straightforward and we gave examples in the other article, but the third is far trickier.

Adjusted total income

The new rules require you to calculate your adjusted total income (ATI). This is your total taxable income, net of most tax deductions and reliefs, ignoring dividends and savings income, to the extent that it exceeds your personal allowances.

Example. Ben is the sole director shareholder of Acom Ltd. In 2017/18 his salary from the company is £10,000. Acom pays him dividends of £70,000. He also runs a small online business which made a loss of £2,000. His profits from letting residential properties is £12,000. He made a pension contribution of £10,000 and gift aid payments of £500. He paid interest on loans to buy the let properties of which £8,000 isn’t deductible under the new rules, but might qualify for a tax credit. The credit is 20% of the lesser of the: disallowed finance costs of £1,600 (£8,000 x 20%), property profits of £2,400 (£12,000 x 20%), and his ATI of nil. The third calculation produces the lowest result. Therefore, Ben isn’t entitled to any tax credit for the loan interest he paid.

The calculation

Ben’s ATI is £10,000 (salary), plus £12,000 rental income, less trade losses and pension contributions (but not gift aid) totalling £12,000. This equals £10,000. His personal allowances are £11,500 which is greater than his ATI meaning Ben’s not entitled to any credit for the interest payments.

Tip. If Ben arranged for Acom to pay into his pension as an employer contribution instead of paying it himself, his ATI would increase by £10,000 to £20,000 (because employer contributions are ignored in the calculation) and there would be an excess of ATI over his personal allowances of £8,500 (£20,000 - £11,500). This would make him entitled to a tax credit of £1,600, being the lowest of the options shown in the bullet points above.

Advice. It’s clear from this and our previous article that working out the allowable tax credit for interest etc. isn’t for the fainthearted. Unless you’re comfortable with the tax issues involved we recommend getting help from an accountant or buying tax software that will identify the key factors and crunch the numbers for you.

For a previous article on the new rules, visit http://tipsandadvice-tax.co.uk/download (TX 17.11.06).