Property allowance and effect on carried forward finance costs

silvercar

Just tackling my 24-25 tax return.

I have some carried forward finance costs (due to low income in the previous year).
It happens to coincide with a year with very low expenses to put against rental income, so I was thinking I would use the £1k property allowance for this year.

AI tells me I cannot use the carried forward finance costs if I’m using the property allowance for this year. If this is true (I never fully trust AI for niche questions), can I carry forward the carried forward finance costs to 25-26 if I am not using them for 24-25 or are they gone forever? 

If the latter it possibly makes more sense to use the actual expenses rather than the property allowance, so thought I would check first.

I appreciate this is super niche question.

Grumpy_chap

AIUI, you have to use either "actual cost" basis or "property allowance" basis and can't mix the two.

I also understand that the finance costs have to be related to the property income to be offset against the property income.  The options for offsetting property income finance costs are far lower than they previously were but I am sure you know that.

I am not an Accountant - there are Accountants on here that will surely be along shortly to provide a fuller response and confirmation / clarification if my understanding is correct / incorrect.

Jeremy535897

A tricky question.
Section 274A of ITTOIA 2005 gives relief at the basic rate for finance costs in a property business. Note section 274A(3), which aggregates current and brought forward figures as a "relievable amount" for the current tax year.
But I think that Section 783BL, which deals with exclusions from claiming property allowance, is all that matters, because it says:
"No relief under this Chapter (property allowance) is given to an individual for a tax year if, in calculating the individual's liability to income tax for the tax year, a tax reduction under section 274A (property business: relief for non-deductible costs of a dwelling-related loan) is applied at Step 6 of the calculation in section 23 of ITA 2007."
Taken at face value, that says you can't claim property allowance if you have finance costs, whether brought forward, current, or both. (I think AI has it the wrong way round when it says you can't claim finance costs if you claim property allowance.) But section 274A talks about being entitled to relief, and I don't think you can be forced to claim it. But that is a complex issue, and I think the straightforward view is that you can't claim property allowance.

silvercar

Jeremy535897 said:

A tricky question.
Section 274A of ITTOIA 2005 gives relief at the basic rate for finance costs in a property business. Note section 274A(3), which aggregates current and brought forward figures as a "relievable amount" for the current tax year.
But I think that Section 783BL, which deals with exclusions from claiming property allowance, is all that matters, because it says:
"No relief under this Chapter (property allowance) is given to an individual for a tax year if, in calculating the individual's liability to income tax for the tax year, a tax reduction under section 274A (property business: relief for non-deductible costs of a dwelling-related loan) is applied at Step 6 of the calculation in section 23 of ITA 2007."
Taken at face value, that says you can't claim property allowance if you have finance costs, whether brought forward, current, or both. (I think AI has it the wrong way round when it says you can't claim finance costs if you claim property allowance.) But section 274A talks about being entitled to relief, and I don't think you can be forced to claim it. But that is a complex issue, and I think the straightforward view is that you can't claim property allowance.

I reached the same conclusion, that I can't claim property allowance if I want to use the finance costs (at basic rate). Presumably there is no compulsion to claim the finance costs and I could instead claim only the property allowance?

My question is really whether, if I decide to claim the property allowance this year, I can then roll over the unused finance costs to next year?

I'm thinking not, because I have finance costs from this year and can't use them if claiming property allowance. So I think not using them also means I can't roll them forward. If I can't roll them forward then logically I can't roll last years forward to this year and then on again to next year. 

Grumpy_chap

silvercar said:

 I have finance costs from this year and can't use them if claiming property allowance. 

I always think of the property allowance as a simpler option to actual costs basis, but there is no guarantee that the simpler option will result in a lower taxation liability.
Most people opting for the simpler option will do so having assessed that it also results in a lower taxation liability, but that is not guaranteed.  Some may be at or just above the threshold and simply opt for the simpler reporting and suffer the small amount of extra taxation.

It is, in my opinion, the LL's equivalent of the VAT flat rate scheme.

Jeremy535897

The legislation says that if you can claim finance costs, you can't claim property allowance.
While you might argue the point, it would never be worth the bother, but if you did claim property allowance, because you gave up your entitlement to claim finance costs, you would lose the brought forward finance costs as well as the current finance costs, as they are treated as part of the relevant amount for the year of claim.

silvercar

Jeremy535897 said:

The legislation says that if you can claim finance costs, you can't claim property allowance.
While you might argue the point, it would never be worth the bother, but if you did claim property allowance, because you gave up your entitlement to claim finance costs, you would lose the brought forward finance costs as well as the current finance costs, as they are treated as part of the relevant amount for the year of claim.

Your last sentence is key, that seems conclusive.

When you say if you "can claim finance costs, you can't claim property allowance" does that mean that if you can claim but choose not to, you can't claim the property allowance?

DRS1

Does this page answer your question?

PIM4460 - Property allowance: contents: exclusions from relief: residential property finance restriction - HMRC internal manual - GOV.UK

silvercar

DRS1 said:

Does this page answer your question?

PIM4460 - Property allowance: contents: exclusions from relief: residential property finance restriction - HMRC internal manual - GOV.UK

It probably would - if I understood it all.

My take away is that I lose the carried forward finance costs from last year,  if I choose to use the property allowance instead of calculating the expenses incurred. Or I could calculate the expenses, this years finance costs plus last years carried forward costs and see if that results in less tax than just using the property allowance.

Thanks all.

Jeremy535897

As I said, I don't think you have a choice. Because finance costs are available to deduct, that precludes claiming property allowance as per section 783BL ITTOIA 2005. Arguing you can't be forced to claim something you are entitled to seems pointless for something worth a few hundred pounds.

silvercar

Jeremy535897 said:

As I said, I don't think you have a choice. Because finance costs are available to deduct, that precludes claiming property allowance as per section 783BL ITTOIA 2005. Arguing you can't be forced to claim something you are entitled to seems pointless for something worth a few hundred pounds.

From the link quoted by @DRS1,

"Where a landlord has residential finance costs that would be restricted in that tax year because of ITTOIA05/S272A, they will have the choice to:

• either claim their expenses (including any allowable finance costs) and the reducer
• or use the property income allowance (whether Full or Partial Relief)

Where the choice is made to use the property income allowance, a carried-forward amount, as defined by S274A(6) cannot be created for that year to be used against the individual’s future years’ income tax liability.

Individuals have the choice of whether to use the allowance, and therefore, not claim the reducer, or to claim the reducer and calculate their tax in the normal way by making an election following the guidance included in the SA Notes, if Full Relief would otherwise apply."

My bolding indicates there is a choice. So now I am very confused.