HMRC internal manual

Property Income Manual

PIM2054 - Deductions: interest: restriction for income tax purposes from 2017/18: introduction

Relevant legislation

Overall the legislation has the effect of limiting relief for relevant interest and finance costs to the basic rate of relief.  The changes take full effect over several years between 2017/18 and 2020/21.

Sections 272A and 272B of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA05) restrict the proportion of interest that can be claimed, on a sliding scale down from 75% to 0% in successive tax years.

Sections 274A, 274AA, 274B and 274C of ITTOIA05 calculate the relievable amount that reduces the amount of income tax payable in that tax year.

Sections 399A and 399B of the Income Tax Act 2007 (ITA07) ensure that these rules also apply to loans taken out by individuals to invest in partnerships which are carrying on residential property businesses.

This legislation was introduced by section 24 of the Finance (No. 2) Act 2015 and section 26 of the Finance Act 2016. The changes take full effect over several years between 2017/18 and 2020/21 (see PIM2058).

Relevant finance costs

The restrictions apply in respect of:

  • Income tax charged in relation to property businesses carried on by individuals (whether alone or in partnership), trustees and personal representatives of deceased estates and individuals who as beneficiaries of estates are chargeable to income tax under Chapter 6 of Part 5 of ITTOIA05 (see TSEM7453).  Companies carrying on property business are not affected.

  • Interest and other finance costs on loans taken out for a property business which involves the letting of residential properties.  Loans which are wholly for commercial properties, or for properties which are used for a furnished holiday letting business (see PIM4100) are not affected

  • Any payments which, although not described as interest, are made in connection with a relevant loan and are economically equivalent to interest in the hands of the recipient.  This would include amounts chargeable under Chapter 2A, Part 4 of ITTOIA05.

  • Any incidental costs incurred in obtaining the loan.  This includes items such as fees or commission payments, but would exclude, for instance, exchange rate losses on a loan taken out in a currency other than sterling.

 Relevant residential property lets

The restrictions apply to what the legislation terms a ‘dwelling-related loan’.  This means any amount borrowed for the purposes of a property business, to the extent to which both of the following apply:

  • the business consists of receiving rental income from a dwelling-house, and

  • the loan amount is used for that part of the business.

“Dwelling-house” has its normal dictionary meaning in this context, and can include part of a dwelling-house as well as the land and gardens attached to the house.  However furnished holiday accommodation which is let commercially (see PIM4100), is specifically excluded from the definition of “dwelling-house”.

A loan will be regarded as being for the purposes of a relevant property business if it is for the acquisition, construction or adaptation of the dwelling-house in question.

Individual beneficiary subject to income tax on estate income including property income

The finance cost restriction also applies to personal representatives carrying on a property business as part of a deceased person’s estate, to the extent that the property business includes income from the letting of a dwelling-house or part of a dwelling-house.

Under Chapter 6 of Part 5 ITTOIA05 an individual is charged to income tax on income treated as arising from an interest in the residue of an estate (see TSEM7453).  If any such estate income includes income from a property business which has had finance costs restricted as a result of section 272A, then the individual is entitled to a reduction at the basic rate in respect of his “relievable amount” relating to that property business.

Trustees of an accumulated or discretionary trust

The interest restriction also applies to the trustees of accumulated or discretionary trusts which are carrying on property business (ITTOIA05/S274B).  For more information about these types of trusts, see TSEM1565. This is calculated as it is for individuals, see PIM2058.

Residential mobile home parks

The interest restriction will not generally apply to residential mobile home parks as they are considered a trade rather than a property business. For further guidance on what is considered a trade please refer to BIM20000.

Furthermore, the interest restriction rules are to restrict relief for finance costs on amounts borrowed for the purpose of generating income from land consisting of a dwelling house, as it is not considered that residential mobile home parks meet this definition in most circumstances the restriction should not apply.