ACCA TX ^UK Syllabus B. Income Tax And Nic Liabilities - Property income finance costs - Notes ^{5 / 9}

If a loan is taken out to either purchase or repair a residential property, there is a restriction on the amount of interest expense that will be allowable.

How does the restriction work?

1. None of the interest will be deducted from property income (100% restriction)

2. The full interest amount will be used to create a tax credit (a deduction from the income tax liability) at 20%.

Who/What does this restriction NOT apply to?

• Companies

• Furnished Holiday Lettings (FHL)

• Non residential property

  - The restriction has no impact on basic rate taxpayers but it still applies to them.

Illustration:

Freddie purchased a freehold house.

The property was then let throughout the tax year at a monthly rent of £1,000.

Freddie partly financed the purchase of the property with a repayment mortgage, paying mortgage interest of £4,000.

The other expenditure on the property amounted to £1,300, and this is all allowable.

Freddie has a salary of £80,000.

Solution

Freddie’s property income is:
Rent received (£1,000*12) = £12,000

Less:
Mortgage interest  = (£0)
Other expenses (£1,300)
Property income £10,700

His income tax liability is:

Employment income £80,000
Property income £10,700
Total £90,700

Less P.A. (£12,570)
Taxable Income £78,130

Income tax

£37,700 * 20% = £7,540
£40,430*40% = £16,172

Total £23,712

Interest relief (£4,000*20%) ( £800)

I.T. Liability £22,912