Landlord tax return - unused residential finance costs brought forward

ellectrastar

Trying to help a friend out who has asked me about residential property finance costs, mainly reference unused costs brought forward. I've figured out the following but wanted to double check I've got it right!

Since the finance tax relief has been phased out over the past couple of years I have entered the set percentage of costs in the relevant boxes. 

In the majority of the examples on the Gov website showing how to work the amount of relief out (20% of the lowest amount of finance costs, profit, or total income exceeding PA) it shows the lower amount as being the finance costs. So all the finance costs are used to calculate the relief and none would need to be carried forward. 

In one example it shows property profit being the lowest, so that is used to work out the amount of relief given, and the difference between that and the finance costs is carried over to the following year to be added to the finance costs.

I've looked at the figures and finance costs are the lowest, however overall they are not exceeding the PA and wouldn't be paying tax anyway. This was the same last year, and the year before. Although the finance costs were the lowest, because they haven't actually benefitted from any relief does this make the amount unused, and can they put the figure from last year's box 44 (residential finance costs not included in box 26) in box 45 as "unused residential finance costs brought forward"? Just thinking if circumstances and income should change then there could be a point where they would be over the threshold...

Jeremy535897

See example 4:
https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies

Savvy_Sue

I am not an accountant, but surely it would be well worth your friend consulting one who specialises in property accounts? It's not a straightforward area.

ellectrastar

Jeremy535897 said:

See example 4:
https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies

Thanks Jeremy, we've seen this but it's example four I am querying. Property profit is the lowest in that example so is what is used to work out the relief, and then the difference between that figure and the finance costs is what's carried out. I want to check if finance costs that are unused due to the PA not being exceeded that year are carried forward as well.

Savvy_Sue said:

I am not an accountant, but surely it would be well worth your friend consulting one who specialises in property accounts? It's not a straightforward area.

Thanks Sue. I have seen people on here who seem to know about these things so was hoping someone might be able to advised. I have dealt with the property accounts for years and always managed okay, it's just these new changes they've brought in over the last couple of years.

Jeremy535897

I guess you need to work through section 274AA ITTOIA 2005:

"274AAReduction for individuals: calculation

(1)This section applies if for a tax year an individual is entitled to relief under section 274A in respect of a relievable amount or in respect of each of two or more relievable amounts, and in the following subsections of this section “relievable amount” means that relievable amount or (as the case may be) any of those relievable amounts.

(2)In respect of a relievable amount, the actual amount on which relief for the year is to be given is (subject to subsection (3)) the amount (“L”) that is the lower of—

(a)the relievable amount, and

(b)the total of—

(i)the profits for income tax purposes of the property business concerned for the year after any deduction under section 118 of ITA 2007 (“the adjusted profits”) or, if less, the share (if any) of the adjusted profits on which the individual is liable to income tax otherwise than under Chapter 6 of Part 5, and

(ii)so much (if any) of the relievable amount as consists of current-year estate amounts.

(3)If S is greater than the individual's adjusted total income for the year (“ATI”), the actual amount on which relief for the year is to be given in respect of a relievable amount is given by—

where—

S is the total obtained by identifying the amount that is L for each relievable amount and then finding the total of the amounts identified, and

L has the same meaning as in subsection (2).

(4)Where—

(a)a relievable amount,

is greater than—

(b)the actual amount on which relief for the year is to be given in respect of the relievable amount,

the difference is the individual's brought-forward amount for the following tax year in respect of the property business concerned.

(5)The amount of the relief for the year in respect of a relievable amount is given by—

where—

AA is the actual amount on which relief for the year is to be given in respect of the relievable amount, and

BR is the basic rate of income tax for the year,

(6)For the purposes of this section, an individual's adjusted total income for a tax year is identified as follows—

• Step 1 Identify the individual's net income for the year (see Step 2 of the calculation in section 23 of ITA 2007).

• Step 2 Exclude from that net income—

  (a)

  so much of it as is within section 18(3) or (4) of ITA 2007 (income from savings), and

  (b)

  so much of it as is dividend income.

• Step 3 Reduce what is left after Step 2 of this calculation by the amount of any allowances deducted for the year in the individual's case at Step 3 of the calculation in section 23 of ITA 2007. The result is the individual's adjusted total income for the year."

My interpretation of this where, say, in a tax year personal allowances reduce taxable income to nil, is that as ATI is nil, ATI/S is nil, so the amount of finance costs used (L) is nil in the tax year, so you treat them as brought forward losses for the next tax year. I welcome any comments as the legislation is not couched in very straightforward terms.

ellectrastar

I think the original thought the individual had from the previous year was that as there was no taxable income there was no reason to carry the amount over, as they didn't anticipate breaching the PA amount. However as these amounts can roll over (I'm not sure for how many years?) they may come into play should the PA amount be exceeded, which is why I was thinking we should include them on this return. I would guess they should still be entitled to use the amounts to claim relief at some point in the future, as it's not as if another figure was used to calculate?

Jeremy535897

There is no downside in entering the figure in the appropriate box on SA100, so they should do so. I am not aware offhand of any time limit on using the unused finance costs.