- in 2017/18 the deduction is restricted to 75% of finance costs
- in 2018/19 the deduction is restricted to 50% of finance costs
- in 2019/20 the deduction is restricted to 25% of finance costs
- from 2020/21 the deduction as currently allowed is fully withdrawn
In its place is a new deduction limited to basic rate tax. In simple cases, a deduction is given amounting to 20% of the tax year’s finance costs.
When taxable profits are less than finance costs, the deduction is limited to 20% of the profit.
Any finance costs not included in the calculation of the deduction can be carried forward and added to finance costs in future years.
The deduction reduces tax payable, but not income. This could have the following effects:
- Basic rate taxpayers could be pushed into the higher rate tax bands.
- Those claiming tax credits could have their entitlement reduced by an increase in taxable income.
- Taxpayers income may be pushed over the £50,000 mark where the Higher Income Child Benefit Charge kicks in.
In certain circumstances it can be worth running a property business via a limited company in order to bypass these rules, although there are other issues to consider before incorporating. Alternatively, the business can be turned into furnished holiday letting, as the rules do not apply to furnished holiday lets. In order to qualify as a furnished holiday letting a business must meet certain conditions, so again the practicalities need to be considered before going down this route.
See our separate guides for further information on incorporating a property business and on furnished holiday lets.