Loan interest treatment

Hi there. It’s Louise Herrington here from Performance Accountancy. This is a very quick video to talk about property rental, and if you have a mortgage or other loan interest that you would have on the buy to let, or whatever other property you might be renting, because things have changed over the last four years and potentially not for the better.

In 2016, the ability to claim mortgage and loan interest against a residential property letting had started to dwindle away. So we started off with 100% was allowable, and then only 75% allowable, 50%, 25%. And guess what? In the year, 2020 to 2021, no mortgage or loan interest can be claimed in the main body of the rental accounts, so it’s not taken as an allowable expense.

Now, we say mortgage interest or loan interest, but it also includes any other financial arrangements you might have with regard to loans on the property. So if you went for a re-mortgage and you had to pay a re-mortgage fee, normally that would be included in the residential property finance cost, but it is still in the area, but it cannot be taken in the actual body of the rental accounts. It now goes into what’s called the residential finance cost, which is below the line adjustment. So you take an allowance of 100% of the interest paid against the residential financial cost, which will then be given a 20% relief on the interest paid.

Bear in mind, property rental is supposed to be from the 6th of April to the 5th of April. So if you normally have a mortgage payment going out, an assignment of interest going out on the 1st of April, you might think, “Oh, that’s in the next tax year,” but no, it’s not. It’s in the 2020, 2021 tax year.

For a basic rate taxpayer, it absolutely makes no difference whatsoever. You’ll still get 20% relief on the residential finance cost, exactly the same way as it would have had if it was in the main body of the accounts. But unfortunately, if you are a higher rate or an additional rate taxpayer, that’s where the difference comes in. You will only get a 20% finance relief for any of the interest charges. So that means your property cost goes up.

Now, a bit of a bummer is that you would know if you’re a 20% tax payer, a basic rate taxpayer, pretty easily. You’ve got your [paying 00:03:06] job. You might have self-employment; you can work out how much it is. Then you’ve got your rental profit and you can say, “Oh yes, I’m a 20% tax payer, doesn’t make any difference.” But you have to look at it by adding in your paying income, your self-employed income and your profit from rental property before interest is taken off, and that may push you into the 40% tax bracket. If it does, then you will only get 20% relief off that finance residential cost. You won’t get any extra. Whereas if you’re deemed to be a 20% taxpayer, you will get your proper allocation. I know it sounds like it’s exactly the same, but the further you go into the 40% tax bracket, the less residential finance cost you will get.

The bad thing about having a residential property and the letting is that you will have to incorporate the profit before finance relief into your income in order to work out how much student loan you will get. Now, that’s a bit of a [inaudible 00:04:21], because you could have lots and lots of profit on property rental and even more interest to bring the profit down, but the finance relief is not considered for the student loan it’s profit made.

So that’s what it is for residential property. If you happen to have a commercial property, then you go, “Whoop-to-do work,” and all your interest is allowable in the proper rental accounts. So therefore less income for your student loan, et cetera.

I hope that’s not too confusing. And any questions then please feel free to contact us. The email address is [email protected], and we’ll try and help with any questions you might have. Thanks then.

 

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