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rented housing

Buy-to-let: How to calculate relief for excess interest


Interest rates are at a 14-year high and landlords are paying a lot more on their buy-to-let mortgages, so how can they get tax relief for the interest which is unrelievable in the current year?

3rd Feb 2023
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Since 2020/21 individual landlords cannot deduct finance costs, including interest, from their residential property rental income for tax purposes. Tax relief is instead given as a basic rate (20%) tax credit, set against the total tax bill for the individual.

The amount of the tax credit is calculated as 20% of the lower of three figures:
•    finance costs which have been restricted for the tax year 
•    profits of the property business for that tax year, after deduction of losses brought forward
•    total income that exceeds the taxpayer’s personal allowances for the tax year (ITTOIA 2005, s 274AA). 
If there is insufficient taxable income in the year to use the tax credit the unrelieved finance charges are carried forward to be set-off against tax due for the following year. 

HMRC has guidance for landlords on how to calculate the tax relief due at the basic rate, including examples of carrying forward unused finance costs. However, all of the HMRC examples on that page use a personal allowance of £11,000, which is a bit confusing. I have provided updated the examples here.   

Example 2021/22

Bill has trading profits of £13,500 and gross rental income of £3,000. His deductible property expenses, including a significant repair, were £6,500 and the interest charges were £4,000.  

Bill claims a property loss of £3,500 on his 2021/22 tax return, which is carried forward to 2022/23, as a property loss of this nature can’t be set against trading income. 

The amount of tax credit is calculated as 20% of the lower of:
•    finance costs= £4,000
•    property profits = nil (a loss)
•    adjusted total income (exceeding Personal Allowance of £12,570) = £930

As there are no property income profits, Bill has no tax credit to set off against his 2021/22 tax liability.  

However, the tax credit is not lost completely, as the unused amount of finance costs (£4000) are carried forward to the next tax year. There is no limit on how many years the unrelieved finance costs can be carried forward. 

Example 2022/23 

This year Bill has let his property for £18,000, the deductible expense are £1500 and the interest payments £6000. His trading profits have also improved to £26,000.

Bill’s property income, after deduction of losses brought forward is £13,000 (£18,000 -£1500 –£3500).

The amount of tax credit is calculated as 20% of the lower of:
•    finance costs= £10,000 (£4,000 + £6000)
•    property profits = £13,000
•    adjusted total income = £13,430 (26,000- 12,570) 

His tax credit for 2022/23 is thus £10,000 x 20% = £2,000. 

Bill’s tax liability for the year is:
         2022/23                 £

  • Property profits    13,000
  • Trading profits     26,000
  • Personal allowance      (12,570)
  • Taxable income     26,430
  • Tax at 20%    5,268
  • Tax credit on finance charges     (2,000)
  • Tax payable     3,268

Correct tax return entries

It is important to record the unused finance charges in the correct boxes on the tax return, so this amount is carried forward and picked up in the calculation for the following year. 

The tax return software should do this automatically, but in case it doesn’t, check that the property section of the return has the following boxes completed:
•    Box 44: current year finance costs
•    Box 45: unused finance costs brought forward. 

It is also important to record the amount of property losses carried forward and brought forward each tax year.  

Cash basis 

All individual landlords with an annual turnover not exceeding £150,000 should use the cash basis of accounting by default (HMRC property income manual PIM1092). 

The taxpayer can make an election to use accruals accounting (GAAP) instead of the cash basis if they think that is more appropriate. The election must be submitted within one year of the filing deadline for the SA return, so by 31 January 2024 for the 2021/22 tax year.  

When the property business is carried on jointly between spouses or civil partners both individuals have to use the same basis of accounting, unless they have made a declaration (under ITA 2007, s 837) that they are beneficially entitled to the income in unequal shares. However, joint property owners who are not married/civil partners don’t have to use the same accounting basis. 


Replies (5)

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By Hugo Fair
03rd Feb 2023 15:30

I'm soooo glad that my moral objection to the concept of BTL has saved me from this world of pain!

It may be relatively simple to program software to handle the calcs (or to pay an accountant to do it all including ensuring that the right figures are put in the right places), but neither of those are what the typical small 'investor' had in mind when signing-up to the story of 'taking care of your own pension with a small side-hustle' (c) various clips on YouTube and elsewhere.

Thanks (1)
By lionofludesch
04th Feb 2023 18:49

I found the rules quite straightforward. The new, post 2017 rules are better for the low income taxpayer than the pre 2017 régime. They can carry forward relief which would've been lost in the black hole of personal allowance under the old rules.

Thanks (2)
By Moo
06th Feb 2023 10:00

New rules not so good for the own company low salary / higher dividend client. They have to choose between reducing dividend and upping their salary (with NI costs) in order to bring the rental profits into charge and get the 20% tax credit or endlessly keep accumulating the unrelieved interest on the property investment.

Thanks (0)
By rij48
11th Feb 2023 18:03


I think that you need to include Bill's property profits in the calculation of "adjusted total income" for 2022/23.


Thanks (0)
By Kathlyn French
19th Jan 2024 11:26

My client and spouse have joint properties which they have now transferred into a partnership and a formal partnership deed has been prepared. There was unused financial charges at the time the properties were transferred and the partnership set up. Can I carry forward those into the partnership bearing in mind they are both property businesses?

Thanks (0)