Tax Forum :: Free Tax Advice

How the tax relief on finance charges work when there's a loss on a property business.

This is for the 2017-18 tax year.
I think I understand the normal case:

Rental Income: 20000
Repairs: 8000
Legal and Professional: 3000
Finance costs:4000

Profit=20000-8000-3000-4000*75%=6000
Tax=6000*45%=2700

Tax relief on finance costs: 1000*20%=200

Total tax due (on property business)=2700-200=2500

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But in my case the let will be commencing on 1st March:

rental income: 2000 (36 days)
(pre letting) Repairs: 8000
Legal and professional: 300
Finance costs:3333

Profit(loss): 2000-8000-300-3333*75%=(8800)

Tax relief on finance costs: 833*20%=166

The 8800 loss I carry forward to next year, that's easy. But what do I do with the 166 of tax relief on the 25% of the finance charges. I think there are three options:
1. I lose it (it's a small enough amount of money that it doesn't really matter)
2. I can offset it against other income tax I will be paying in 2017-18
3. I carry it forwards to next year alongside the 8800 and reduce next years property income tax bill by 166 (plus 20% of 50% of whatever next years finance charges are)

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And a question I asked previously but got no replies: does anyone know if the rental loss affects adjusted income for pension tapering in the 2017-18 tax year or the 2018-19 tax year when it will be used?

And, of course, as soon as I ask the question I find the answer:

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

So I lose it.

Still have the question about adjusted income though.

No. I take it back. Further down there's an example which has this:

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.

So I carry the 833 forward to the following year and get basic rate relief on that.

Thanks for the example - most useful, I see you do really take an interest in property tax matters

It will be interesting to see how the HMRC software deals with the staggered interest relief.

I imagine my clients are going to be very confused too with the calculation and when landlord submits their own tax returns online for 2017/18. I guess many are still unaware of the changes.