Individuals Letting Residential Property
For individuals letting residential property, tax relief on mortgage interest payments is restricted to the 20% basic rate tax. The way this is done is as follows:
Step 1 - Disallow the Interest Cost. This has the effect of increasing profits subject tax and potentially pushing the tax payer into a higher effective rate of tax.
Step 2 – Reduce the tax bill by the allowable Interest cost x 20%. This is called a Tax Reducer. Importantly this step does not reduce the profit figure on which tax is calculated. There are some circumstances when the interest used in the calculation is restricted, resulting in unused interest relief being carried.
The above rule for individuals letting residential property does not apply to :
For these landlords interest is generally allowed as an expense to set against profits.
Further Considerations For Individuals
For individuals the amount of interest allowed as an expense (or tax reducer if residential) maybe be further limited. For example when a property is re-mortgaged above it's original purchase value, or when re-mortgaged above the figure for amount owing at the date the letting commenced.
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Director - Ian Blackwood CA CTA