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Could you use a Tax Credit to Reduce your Self-Assessment Tax Bill?

By RJP LLP on 16 February 2023

Buy to let has become a more challenging proposition for many investors over recent years  due to the reduction in mortgage interest relief and, more recently, significant rises in interest rates. Landlords who own let properties personally and are higher rate taxpayers are now unable to claim full tax relief for loan interest payments at a time when the cost of borrowing is the highest it has been for decades.  If you have buy to let investments, you may have experienced the effects of this already in your tax payments.

Although it is no longer possible, for residential property investments, to reduce taxable rental income with loan interest, it remains possible to reduce your overall tax liability by 20% of the cost of the loan interest by claiming a tax credit. This article explains how the tax credit works with some examples, so you can be aware of its availability.

In the past, landlords could simply deduct the cost of borrowing from their rental income to reduce taxable income. This is no longer possible, but landlords can claim a 20% tax credit against their total tax liability provided enough rental profits are made for the period. If sufficient rental profits are not made, the value of the tax credit can be carried over to the next tax year.

How the basic rate tax credit works

When the 20% tax credit is calculated, the amount available is taken as being the lower of these three options:

  • Finance costs incurred against residential property income;
  • Property related profits after deducting any losses brought forward; and
  • Your total income after deducting your annual personal allowance (currently £12,570).

If you did not make enough taxable income during the tax year to utilise your available tax credit but incurred mortgage interest costs, these costs can be carried forward and offset against your tax liability in the following tax year. In their guidance notes, HMRC describes this as ‘carrying forward unused finance costs’.

Worked example: Here’s how it could work for next year’s self-assessment tax return

Landlord’s tax situation in 2021/22

Claire is a part time landlord with a buy to let properly and she also works as a self employed designer. In the last tax year, she had trading profits of £15,000 for her design work and the rental income on her rental property was £10,000. Tax deductible property expenses were £11,500 due to a significant repair required and her mortgage interest costs were £7,000.

The repairs meant Claire made a loss on her property of £1,500, which is declared on her 2021/22 tax return. This amount can be carried forward to 2022/23. She was not eligible for a 20% tax credit because her property made a loss and this was the lower figure of the three eligibility criteria outlined above:

  •  Finance costs were £7,000;
    •    Profits on property income – she made a loss of (£1,500);
    •    Taxable total income was £25,000 - £12,570 = £12,430.

The finance costs can be carried forward to her 2022/23 tax return or if necessary, the following year, and she can claim tax relief on them at 20% providing she has sufficient taxable rental profits.

Claire’s possible income tax scenario for 2022/23 

  • Business profits of £17,000;
  • Property income of £13,000;
  • Deductible expenses on property of £3,000;
  • Mortgage interest payments of 7,000.

Property income, after deduction of the £1,500 losses brought forward is £13,000 – 1,500 – 3,000 = £8,500. The 20% tax credit is calculated using the lowest value of the three figures:

  • Interest costs = 14,000 (2 x 7,000 for the two years);
  • Property profits = £13,000;
  • Taxable total income = £30,000 - £12,570 = £17,430.

Claire is therefore entitled to a tax credit for 2022/23 calculated as £13,000 x 20% = £2,600. This can be used together with her £12,570 personal allowance to reduce her tax liability for the year.

If you have personally owned rental property and are wondering how to use the tax credit option available, please contact us for tax planning advice. We may be able to identify other ways to reduce your tax bills too. Email us via partners@rjp.co.uk.

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60 Day Deadline for CGT Returns and Tax Payments

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