The residential property finance cost restriction

The rule

Section 272A of the Income Tax (Trading and Other Income) Act 2005 stops a deduction for the costs of a dwelling-related loan when working out property business profits for income tax. It was phased in: 75% of the costs were allowed in 2017 to 2018, 50% in 2018 to 2019 and 25% in 2019 to 2020, with no deduction from 2020 to 2021 onwards.

Relief comes as a reduction in the income tax bill, under sections 274A to 274C of the same Act. HMRC's Property Income Manual at PIM2054 says this gives relief at the basic rate, whatever the landlord's marginal rate.

Who and what it covers

• Individuals, alone or in partnership, trustees and personal representatives with a property business (PIM2054).
• Companies are not affected. Section 272A does not apply when charging a company to income tax on profits it receives other than in a fiduciary or representative capacity.
• Interest on dwelling-related loans, other payments made in connection with the loan, and incidental costs of obtaining the loan.
• It does not apply to loans for commercial property. Furnished holiday lettings were excluded until 5 April 2025.

Working out the tax reduction

1. Finance costs

   Take the finance costs not deducted in the year, plus any brought forward from earlier years (GOV.UK).

2. Property business profits

   Take the property business profits for the year.

3. Adjusted total income

   Take adjusted total income, which is income above the personal allowance excluding savings and dividend income.

4. Apply the basic rate

   The reduction is the basic rate, 20% according to GOV.UK, of the lowest of the three amounts.

5. Carry forward the rest

   Where the lowest amount is the property profits or adjusted total income, the difference between that figure and the finance costs is carried forward to the next year.

Limits on the reduction

GOV.UK says the tax reduction cannot create a tax refund. PIM2058 explains how the reduction is shared where a landlord has more than one property business and the total relievable amount exceeds adjusted total income: each business's amount is scaled by adjusted total income divided by the total, and the unrelieved balance is carried forward. HMRC's worked example has total amounts of £7,000 against adjusted total income of £6,000, giving relief on £6,000 at the basic rate and £1,000 carried forward.

Worked example with the full reduction

For example, a landlord has rent of £20,000, other allowable expenses of £3,000 and mortgage interest of £8,000, and a salary of £40,000. Applying the GOV.UK method, the property business profit is £20,000 less £3,000, which is £17,000. The mortgage interest is not deducted.

The three amounts are finance costs of £8,000, property profits of £17,000 and adjusted total income well above £8,000. The lowest is £8,000, so the tax reduction is 20% of £8,000, which is £1,600. Nothing is carried forward.

Worked example with a carry forward

For example, a landlord has rent of £12,000, other expenses of £7,000 and mortgage interest of £8,000. The property business profit is £5,000. The lowest of the three amounts is the property profit of £5,000, so the tax reduction is 20% of £5,000, which is £1,000. The remaining £3,000 of finance costs is carried forward and added to next year's finance costs, as GOV.UK describes.

Questions