Property allowance and effect on carried forward finance costs

Dazed_and_C0nfused

silvercar said:

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.

The paragraph in bold could be construed as meaning a new carry forward amount cannot be created for the tax year the property allowance is being used for. 

Which is a different question as to whether an existing carry forward amount from the previous tax year, can effectively skip a year and be used in the next tax year (the one after the tax year the property allowance was claimed for).

Tax does have to be taxing!

silvercar

Dazed_and_C0nfused said:

silvercar said:

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.

The paragraph in bold could be construed as meaning a new carry forward amount cannot be created for the tax year the property allowance is being used for. 

Which is a different question as to whether an existing carry forward amount from the previous tax year, can effectively skip a year and be used in the next tax year (the one after the tax year the property allowance was claimed for).

Tax does have to be taxing!

I tend to agree. Once the property allowance is used any finance costs, for this year or previous, are gone. So that my OP answered.

but @Jeremy535897, seems to suggest that if you have finance costs, you can’t claim the property allowance instead. Or that is what I interpreted his comment mean. Which is odd because the bit I quoted talks of choice and others have commented that some prefer to use the property allowance to keep things simple.

Dazed_and_C0nfused

silvercar said:

Dazed_and_C0nfused said:

silvercar said:

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.

The paragraph in bold could be construed as meaning a new carry forward amount cannot be created for the tax year the property allowance is being used for. 

Which is a different question as to whether an existing carry forward amount from the previous tax year, can effectively skip a year and be used in the next tax year (the one after the tax year the property allowance was claimed for).

Tax does have to be taxing!

I tend to agree. Once the property allowance is used any finance costs, for this year or previous, are gone. So that my OP answered.

but @Jeremy535897, seems to suggest that if you have finance costs, you can’t claim the property allowance instead. Or that is what I interpreted his comment mean. Which is odd because the bit I quoted talks of choice and others have commented that some prefer to use the property allowance to keep things simple.

Starting point is someone has unused finance costs, say £2,500 after filing their 2023/24 return.

Can they claim the trading allowance instead of actual costs when completing their 2024/25 return?  I think yes, they can choose the trading allowance over actual expenses if they wish.

By choosing the trading allowance for 2024/25 they cannot create a new finance cost element for 2024/25 to carry forward.

But if they revert to actual expenses on their 2025/26 return and have a rental income profit of say £15,000 which they are paying basic rate tax on (basic rate on the whole £15,000 as Personal Allowance is used elsewhere) can they carry forward the existing unused finance costs of £2,500 from 2023/24 🤔.  Basically skipping 2024/25 as the property allowance was claimed that year.

DRS1

silvercar said:

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.

I don't think I am going to help the confusion.  The HMRC manual I linked to certainly says you have a choice.

When I look at the section quoted by @Jeremy535897 I think that supports the choice view 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."

That suggests that the reduction doesn't have to be applied.  So you have a choice.

Where it gets less clear is when you go to step 6 which says
"Deduct from the amount of tax calculated at Step 5 any tax reductions to which the taxpayer is entitled for the tax year under a provision listed in relation to the taxpayer in section 26."

The use of is entitled suggests that if it is available to you you have to use it.  So NO choice.

I admit there are other bits of the legislation I have not thought about - setting out the order in which you use the reductions and a cap on the level of reduction but I am not sure they are relevant.  Though they may explain how some of the reduction is NOT applied at step 6 (ie because of a restriction in section 29 not because of a choice made by the taxpayer).

Frankly if the manual says you have a choice then I think it is safe to believe you have a choice.  HMRC won't tell you that you are wrong.  Then you have to decide if you lose all the carried forward finance costs for future years.  I suspect you do.  If so do you mind?

Jeremy535897

I guess the Inland Revenue manual dispels the risk that HMRC will say you don't have the choice. But I am clear that the legislation treats brought forward and current finance charges as one aggregated sum, so if you choose not to claim them,I think they are lost (although if you couldn't have used them all anyway, maybe the balance you couldn't have used is able to be carried forward).

silvercar

I’m going to work on the basis that if I don’t use this years (24-25) plus the carry forward (23-24) and claim property allowance instead they are gone for good. Will have to do a calculation to see which is more beneficial. I’ll then assume that next year will be a clean slate with no carry forward from 24-25 if I’ve used the property allowance.

Thanks for all the discussion. 

Jeremy535897

I believe you have reached the correct conclusion.