Help with ‘unused residential property finance costs from earlier years’

silvercar

Just completing my tax return for 19/20 and have a query on the above.
I made a note to myself that I need to adjust my tax return for last year to include unused residential property finance costs from previous year and I can see that the tax calculation for 2017/18 shows a line headed ‘minus relief for finance costs £297 reduced to max allowance’ that is £0x 20% = £0. So I know that the £297 should go in the return for 2018/19.
for the year 2018/2019 I can see the calculation  shows ‘minus relief for finance costs £613 reduced to max allowable and the £393 is the amount used. So I think I have 613-393=220 plus the 297 from the previous year = 517. 

For the return I am doing now, I can see that I have 972 unused to carry forward.
I am assuming this is increasing each year as the portion of mortgage interest allowed as an expense against rental income is reducing. At the same time as my income excluding dividends is barely above my personal allowance.
if anyone could confirm the 517 I would be grateful.

oldbikebloke

without seeing your full calculation and which of the 3 values has resulted in the cap, you are correct in principle

although this does not deal with the transition period, example 4 covers carried over unused costs
Tax relief for residential landlords: how it's worked out - GOV.UK (www.gov.uk)

silvercar

oldbikebloke said:

without seeing your full calculation and which of the 3 values has resulted in the cap, you are correct in principle

although this does not deal with the transition period, example 4 covers carried over unused costs
Tax relief for residential landlords: how it's worked out - GOV.UK (www.gov.uk)

Thank you.
In every year it is the income over the personal allowance that is the limiting factor as that is nil or low.

Jeremy535897

It depends on why you get limited relief for the finance costs, because it could be:

• an insufficiency of property income; or
• an insufficiency of total income

As noted earlier, Example 4 explains the carry forward of unrelieved residential property finance costs where property costs exceed property income. But if your property income exceeds your property costs (including residential property finance costs), those residential property costs are set against the property income in full, with no carry forward, even though you get no actual tax relief because your personal allowance is sufficient to remove it. For example, if your rental income net of allowable expenses was £12,000 before deducting residential property finance costs of £2,000, and your other taxable income was £1,000, your tax liability would be £13,000 - £12,500 @ 20% = £100, less tax in respect of residential property finance costs £2,000 @ 20% = £400, limited to £100, but there would be no carry forward.

silvercar

oldbikebloke said:

without seeing your full calculation and which of the 3 values has resulted in the cap, you are correct in principle

although this does not deal with the transition period, example 4 covers carried over unused costs
Tax relief for residential landlords: how it's worked out - GOV.UK (www.gov.uk)

Jeremy535897 said:

It depends on why you get limited relief for the finance costs, because it could be:

• an insufficiency of property income; or
• an insufficiency of total income

As noted earlier, Example 4 explains the carry forward of unrelieved residential property finance costs where property costs exceed property income. But if your property income exceeds your property costs (including residential property finance costs), those residential property costs are set against the property income in full, with no carry forward, even though you get no actual tax relief because your personal allowance is sufficient to remove it. For example, if your rental income net of allowable expenses was £12,000 before deducting residential property finance costs of £2,000, and your other taxable income was £1,000, your tax liability would be £13,000 - £12,500 @ 20% = £100, less tax in respect of residential property finance costs £2,000 @ 20% = £400, limited to £100, but there would be no carry forward.

Just when I was understanding it, I am now totally confused. Sorry. 
2018-19
PAYE 8424
interest 141
profit from property 3819
dividends 7920
Total income 20304
minus personal allowance 11850
---
tax on pay 393 x .20 = 78.60
tax on dividends 5920 x .075= 444
tax due =522.60
Minus relief for finance costs of 613 reduced to max allowed 393 x .20=78.60
tax due 444
----
so I thought 613-393=220 could be carried forward, but Jeremy's comment makes me unsure.
If it can't be carried forward, can you explain why please.

Jeremy535897

It can't be carried forward because you don't have a loss. Stripping out all the data that doesn't affect the issue, let me give you an old style example.
Joe has no income apart from the net rent on his buy to let. In 2016/17 his gross rent is £16,000 and his mortgage interest is £4,000. His personal allowance is £11,000. His tax bill is therefore £1,000 at 20% = £200.. His net rental profit is £12,000. There is no loss to carry forward.
Ben is less fortunate. In 2016/17 his gross rent is £2,500 and his mortgage interest is £4,000. His personal allowance is £11,000, but he wastes it as he has no income. He can carry forward his rental loss of £1,500 to 2017/18 (but can only use it against a rental profit).

Fast forward to 2020/21. Joe's rent is still £16,000 and his mortgage interest is still £4,000. His personal allowance is £12,500. Joe's tax bill is £3,500 @ 20% = £700, but he has a tax credit of £4,000 @ 20% = £800. As he only has a liability of £700, he can only use £700 of the tax credit. The other £100 is wasted. Joe's rent exceeded his finance costs so there is no loss.
Ben is as badly off as before. His residential finance costs exceed his rental income by £1,500, so he can carry this forward, and if he ever makes a rental profit and has a tax liability, there is a tax credit of £300 to claim against his basic rate tax.

oldbikebloke

you say in every year the cap is the income after PA, but your interest is 141 compared to 393 income? 
is the 141 the 50% residue for 18/19 having deducted the other 50% in calculating the rental profit? 

silvercar

oldbikebloke said:

you say in every year the cap is the income after PA, but your interest is 141 compared to 393 income? 
is the 141 the 50% residue for 18/19 having deducted the other 50% in calculating the rental profit? 

The 141 is interest on savings accounts, paid gross.

silvercar

Ahh now I see.
So I haven’t hardly been taxed on the property profit so I can’t reduce the tax because of it. And I haven’t made a loss, so can’t carry it forward.
Shame the dividend tax I’ve paid can’t be reduced to allow for the property interest I’ve paid.
thanks all!

Jeremy535897

Your last sentence got me thinking again. My example is right, but I didn't appreciate that dividends could have anything to do with residential finance costs. Why would they? But on reflection I think they do:

"How the tax reduction is worked out

The reduction is the basic rate value (currently 20%) of the lower of:

• finance costs - costs not deducted from rental income in the tax year (this will be a proportion of finance costs for the transitional years) plus any finance costs brought forward
• property business profits - the profits of the property business in the tax year (after using any brought forward losses)
• adjusted total income - the income (after losses and reliefs, and excluding savings and dividends income) that exceeds your personal allowance

The tax reduction can’t be used to create a tax refund.

If the basic rate tax reduction is calculated using the ‘property business profits’ or ‘adjusted total income’ then the difference between that figure and ‘finance costs’ is carried forward to calculate the basic rate tax reduction in the following years."

From https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies

In your case, the lowest reduction in the basic rate value is 20% of the adjusted total income, which in your case is £3,819 plus £8,424 =£12,243 less £11,850 = £393 @ 20%, and you can therefore carry forward the excess of £613 less £393 = £220. My apologies for not seeing this point before!

silvercar

Last year I posted about this and was told dividend income wasn’t considered:
https://forums.moneysavingexpert.com/discussion/comment/75310095#Comment_75310095 

I need to re read it.