|Although finance costs, predominantly loan interest, are now disallowed as an expense that can be utilised to reduce taxable rental income, these charges do qualify for a tax credit limited to 20% basic rate Income Tax. For example, if your loan/mortgage interest amounts to £10,000 this cannot be used to reduce your rental income. It will simply reduce your Income Tax bill by £2,000 (£10,000 x 20%).
However, there are three hoops that these claims need to jump through. The tax deduction is worked out as the lower of:
It is the final condition that can catch taxpayers out and deny relief. For example, if the majority of earnings are dividend income, and other earnings in total are lower than the annual personal tax allowance, currently £12,570, then no relief for finance charges can be claimed.
This could impact director shareholders of smaller companies with personal property income and finance costs, who many have adopted the high-dividend low-salary approach to taking remuneration from their company
This is a further justification for ongoing tax planning to ensure that all options are considered and reviewed to minimise overall tax payments.