Interest relief – Mixed portfolios and mixed-use properties - Landlords Financial | Landlords Bookkeeping Accountants
The way in which an unincorporated landlord receives tax relief for interest and finance costs depends on whether or not the property is a residential property. Relief for interest and finance costs incurred by unincorporated landlords in respect of residential lets is given as a basic rate tax reduction, whereas the interest and finance costs relating to non-residential properties are deducted in calculating the taxable rental profits.
Where a property portfolio comprises both residential and non-residential lets or where a property has both residential and non-residential parts, it is important that interest and finance costs are treated correctly.
Mixed property portfolios
Where an unincorporated landlord has a property portfolio which includes both residential and non-residential lets, the treatment of interest and finance costs will depend on the nature of the property to which they relate. Where there are separate mortgages for each property, it is straightforward to identify whether the interest relates to a residential or a non-residential property. The interest relating to non-residential lets can be deducted in calculating the taxable rental profit whereas relief for the interest on the residential lets is given in the form of a basic rate tax reduction.
Example
Hughie owns two properties which he lets out – a flat and an industrial unit. The flat has a mortgage of £100,000 and Hughie pays interest of £4,000 in the tax year. The industrial unit has a mortgage of £60,000 in respect of which Hughie pays interest of £3,600.
He can deduct the interest of £3,600 paid in respect of the industrial unit in calculating the taxable rental profits. However, relief for the interest on the residential mortgage is given as a basic rate tax reduction of £800.
Mixed-use property
Where a property has both residential and non-residential parts, as would be the case for a shop with a flat above it, the interest must be apportioned to the various parts on a just and reasonable basis. For example, this may be by reference to the value of each part or by floor area.
The interest apportioned to the non-residential part can be deducted in calculating the taxable rental profits, whereas relief for the interest apportioned to the residential part is given as a basic rate tax reduction.
Example
Bella lets out a shop with a flat above. She has a mortgage of £200,000 on the premises on which she paid interest of £10,000 in the tax year in question. The flat accounts for 60% of the floor area and the shop for 40%.
£4,000 of the interest (40% of £10,000) is attributed to the shop and deducted in calculating the taxable rental profits. The balance of £6,000 (60% of £10,000) is attributed to the flat and relieved as a basic rate tax reduction of £1,200.
Interest relief – Mixed portfolios and mixed-use properties - Landlords Financial | Landlords Bookkeeping Accountants
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