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Interest restriction and connected persons

How do the two interact?

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Hi all

So!  Client lets property to son at below market rent.  Expenses are therefore restricted such that they cannot exceed income.  All good.

Except I now find myself wondering how this interacts with the 'new' interest rules.  Say she gets rent of £10,000 and pays interest (no other expenses) of £10,000 in 17/18.  Does she get the £7,500 deduction from rent, plus 20% of the £2,500 as a tax reducer?  That seems safe, however what if the figures are instead £9,000 rent and £12,000 interest - does she get the £9,000 deduction (as this isn't creating a loss) AND still get the tax reducer?  Or does she only get £6,750 as a deduction and then 20% of £2,250 as a tax reducer?

I hope you see what I'm getting at (and I hope I'm not being [too] daft!).

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29th Nov 2018 09:26

I have a similar situation. Haven’t given it any thought yet. In your 9k/12k scenario, if you show the full 12k interest which reduces to 9k in the profit comp so no loss but then they are getting the “benefit” of 3k at 20%.

If you only show 9k interest in the first place then there will be some profit and a lower 20% reducer - a win for the taxman.

Add the complication of other expenses to the mix. Can you maximise the other expenses and only show a proportion of the interest so no loss is created. Back to the question of no loss created before or after the 25% tax reducer? Bearing in mind we’re working to minimise our client’s tax whilst staying within the letter of the law!

Anyone seen a worked example of this anywhere?

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29th Nov 2018 11:22

I don't know the answer, but I'm going to guess that you restrict the interest to the point where there would be no loss, then you lose 25% of it and get 20% of that as a tax reducer, because that's the least advantageous to the landlord and we all have to hate landlords now.

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By Rweaver
29th Nov 2018 11:41

Rental income - £9,000

Interest - £12,000 x 75% = £(9,000)

Property business profit = £nil.

Super – no issue with PIM2130.

Tax reducer is the LOWER of:

a) The relievable amount (£3,000);
b) Property profit (£nil); and
c) Adjusted total income (£?).

Take your pick.

Thanks (2)
to Rweaver
29th Nov 2018 16:48

Rweaver wrote:

Tax reducer is the LOWER of:

a) The relievable amount (£3,000);
b) Property profit (£nil); and
c) Adjusted total income (£?).

Take your pick.

Good point, I've not done many of these so I totally forgot about the fact you need to do those 3 calcs (I've oversimplified).

I believe you are correct!

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By Pukka
to Rweaver
29th Nov 2018 17:22

Would you carry forward the excess finance costs (i.e. £3k) to following years?

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