Deduction of interest against property income ― income tax rules

Produced by a Tolley Owner-Managed Businesses expert

Owner-Managed Businesses

Guidance

Produced by Tolley in association with Rob Durrant-Walker of Crane Dale Tax

This guidance note sets out the restriction on the deduction of interest again rental income for individuals with a residential property letting businesses.

Interest costs for income tax purposes

An area that commonly raises questions regarding its deductibility against rental income is interest (often the single biggest cost for a landlord).

The rules are different for income tax and for corporation tax. For corporation tax rules, see the Deduction of interest against property income ― corporation tax rules guidance note.

Prior to 2017/18 (see below), interest was treated as a revenue expense for both commercial and residential properties, with the incidental costs of obtaining loan finance specifically allowed as revenue costs.

From 2017/18, the method of relief for residential property changed. Furnished holiday lets (FHL) for this purpose are specifically excluded from the change and treatment for interest costs remains aligned with commercial property. However, FHL treatment is expected to re-align with ordinary residential lets in all regards

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