RE401 - Interest paid: Loans for other purposes: Interest on loans to buy or improve property for letting
For 1995-96 onwards relief for interest paid on a loan to buy or improve a property for letting is given as a deduction in computing Schedule A profits.
ICTA88/S355
For 1994/95 and earlier years there were special rules for
giving relief for interest paid on loans to buy or improve a
property for letting. Relief is not restricted to the £30,000
limit and is given at the borrowers highest rate of tax . Normally
you can allow relief against letting income only. If the interest
paid in a year is more than the letting income you can allow the
excess interest in later years against letting income only. More
details are given about this below.
When you get a claim, check that the property
- is a house, flat or some other interest in land, or a caravan or houseboat as described in RE341;
- was let for more than 26 weeks, out of any continuous period of 52 weeks at a commercial rent (these do not have to be wholly in one year of assessment); and
- was available for letting when it was not actually let.
You may regard a property as available for letting if
- it could not be occupied because of construction or repair works; or
- it was being used as an only or main residence by the borrower or, where the loan was made before 6 April 1988, by a dependent relative of the borrower or the borrower's divorced or separated spouse.
ICTA88/S355
Where all the conditions are met give the relief against the letting income from the property for the year in which the interest was paid. where there is a balance.
- give the balance of relief as far as possible against any letting income from other property for the same year; and
- carry any unused balance forward for relief in the following year or years. But you can only give relief if the property for which the loan was taken out is still let or available for letting as above.
Example (The 26 and 52 week rule and carry forward of unused relief)
A buys a property for commercial letting on 1 January 1991 with a loan of £50,000 at interest of 12 per cent payable monthly in advance. It is the only property A owns. Details of lettings are as follows:
| From 1.1.91 to 31.7.91 | Renovated |
| From 1.8.91 to 31.8.91 | Available for letting |
| From 1.9.91 to 31.12.94 | Let @ £625 a month |
A claim to relief was established on 3 March 1992 when it was
clear that the property had been let at a commercial rent for more
than 26 weeks in a 52 week period. Interest paid was not eligible
for relief until 4 March 1991. This was the start of the first 52
week period in which the property was let for more than 26 weeks
and when not let was treated as available for letting. Interest of
£1,500 paid before 4 March 1991 does not qualify for relief.
1990-91
| Rent received in year
Interest allowable Surplus interest carried forward | NIL
£500 £500 |
1991-92
| Rents assessable | £5,000 |
|
| Interest allowable |
|
|
| Paid in year | £6,000 |
|
| Brought forward | £ 500 | £6,500 |
| Surplus interest carried forward |
| £1,500 |
1992-93
| Rents assessable |
|
|
| Interest allowable |
| £7,500 |
| Paid in year | £6,000 |
|
| Brought forward | £1,500 | £7,500 |
1993-94
Interest qualifies for relief until the property is sold
Example 2 (How relief is given for a period of owner occupation)
A buys a property for commercial letting on 1 January 1991 with a loan of £50,000 at interest of 12 per cent payable monthly in advance. It is the only property A owns. Details of the letting are as follows
| From 1.1.91 to 5.2.91 | Available for letting |
| From 6.2.91 to 5.8.92 | Let at rent of £525 a month |
| From 6.8.92 to 5.4.93 | Owner-occupied |
| From 6.4.93 to 5.4.94 | Let again at rent of £625 a month |
| 6.4.94 | Property sold |
A claim to interest relief was established by 1 January 1992 as
the property had then been let for more than 26 weeks in a 52 week
period and was available for letting during the remainder of the
period.
1990-91
| Rents assessable
Interest allowable Surplus interest carried forward £950 | £1,050
£2,000 £950 |
1991-92
| Rents assessable |
|
|
| Interest allowable |
| £6,300 |
| Paid in year | £6,000 |
|
| Brought forward | £ 950 | £6,950 |
| Surplus interest carried forward |
| £650 |
1992-93
| Rents assessable |
|
|
| Interest allowable |
| £2,100 |
| Paid in the period £6,000 x 4/12 = | £2,000 |
|
| Brought forward | £ 650 | £2,650 |
| Surplus interest carried
forward
for relief against future letting income |
| £550 |
Period 6.8.92 to 5.4.93
Interest allowable against taxpayer's income as the property
was owner occupied. Relief is subject to restriction for loans over
£30,000
| Interest paid | £6,000 | x | 8/12 | = | £4,000 |
|
|
| Eligible for relief | £4,000 | x |
| £30,000
£50,000 |
| = | £2,400 |
The balance of £1,600 (£4,000 - £2,400) is not
available for relief. It cannot be given against letting income for
1992-93 or any other year.
1993-94
| Rents assessable |
|
|
| Interest allowable |
| £7,500 |
| Paid in year | £6,000 |
|
| Brought forward | £ 550 | £6,550 |
| (from 4 months to 5.8.87) |
|
|
| Chargeable |
| £950 |
Example 3 (Break in the 26 and 52 week rule and treatment of
surplus unused relief when property sold).
A buys a property for commercial letting on 1 January 1991
with a loan of £50,000 at interest of 12% payable monthly in
arrear. It is the only property A owns. Details of the letting are
as follows
| From 1.1.91 to 31.12.91 | Let at rent of £500 a month |
| From 1.1.92 to 31.3.92 | Available for letting |
| From 1.4.92 to 30.6.93 | Renovated |
| From 1.7.93 to 30.6.94 | Let again at rent of £850 a month |
| 01.07.94 | Property sold |
Claim to interest relief was established on 31 December 1991 as
property had then been let for more than 26 weeks in a 52 week
period.
1990-91
| Rents assessable (3
months)
Interest allowable Surplus interest carried forward | £1,050
£2,000 £500 |
1991-92
| Rents assessable |
|
|
| Interest allowable |
| £4,500 |
| Paid in year | £6,000 |
|
| Brought forward | £ 500 | £6,500 |
| Surplus interest carried forward |
| £2,000 |
1992-93
The 52 week period ended on 30 June 1992 - 26 weeks from the
end of the first letting. The next 52 week period started on 1
January 1993 - 26 weeks before the start of the second letting.
No relief is due for the interest paid for the period 1 July
1992 to 31 December 1992 (6 months) as it did not fall within a 52
week period in which the property was let for more than 26
weeks.
| Rents assessable |
|
|
| Interest allowable |
| NIL |
| Paid in the period £6,000 x 6/12 = | £3,000 |
|
| Brought forward | £2,000 | £5,000 |
| Surplus interest carried forward |
| £5,000 |
1993-94
| Rents assessable (9 months) |
| £7,650 |
| Interest allowable |
|
|
| Paid in year | £6,000 |
|
| Brought forward | £5,000 | £11,000 |
| (from 6 months to 30.6.93) |
|
|
| Surplus interest carried forward |
| £ 1,800 |
1994-95
| Rents assessable (3 months) |
| £2,550 |
| Interest allowable |
|
|
| Paid in year | £1,000 |
|
| Brought forward | £3,350 | £4,350 |
| (from 6 months to 30.6.93) |
|
|
| Surplus interest carried forward |
| £1,800 |
No relief can be given for the unused surplus interest of £1,800 as the borrower no longer owns the property, unless there are rents for 1994-95 from other commercially let property against which it can be set.
LOAN ALSO ELIGIBLE FOR RELIEF FOR INTEREST PAID ON A LOAN TO BUY A MAIN RESIDENCE
Where a property is let and the borrower is
- temporarily absent because of an employment, see RE347; or
- living in job-related accommodation, see RE347
he or she will have dual eligibility to relief.
1995-96 ONWARDS
For 1995-96 onwards, a borrower who has dual eligibility can
choose each year whether to claim
- mortgage interest relief as an income tax reduction; or
- a deduction in computing Schedule A business profits
There is no special form of election and joint borrowers can
each choose as they choose.
See RE566 for loans eligible for MIRAS.
1994-95
For 1994-95 relief was given as a deduction or set off
against letting income unless the borrower elected to claim
mortgage interest relief as an income tax reduction. The election
must be made in writing before 6 April 1996. There is no special
form of election and joint borrowers can each choose as they wish.
See RE566 for loans eligible for MIRAS.
EARLIER YEARS
For 1993-94 and earlier years, the borrower could choose each year whether to claim
- mortgage interest relief as a deduction against general income; or
- a deduction or set-off against letting income.
