Relief for finance costs reduced to maximum allowable

Hello, in my self assessment, the relief for finance costs reduce to maximum allowable is showing as zero, even though the amount of the relief would have been the lowest compared to other relevant numbers (having read your guide on this already https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies). Is there a technical problem on the system? Interest income: £76000 Rental income: £28000 Less: Allowable expenses: -£16000 Property profits: £12000 Total Income: £88000 Less Personal Allowance -12570 Taxable Income: £75430 Income tax calculation: £5500 x 0% = £0 £32200 x 20% = £6440 £37,730 x 40% = £15092 Less 20% tax reduction for finance cost (£9100 x 20%) -£1820 Final income tax should be: £19712. However, the system calculated the tax reduction to be zero, and the Final income tax to be £21532. However, the tax reduction of is the lowest of: - finance cost £9100 - property profits £12000 - adjusted total income £75430 The lowest amount is finance costs, so there should be the £1820 tax reduction, but there isnt. Is this a technical problem? Also, I tried to call the helpline twice (0300 200 3310), both times waited over 40 minutes and did not receive any help (one time the advisor put me on hold for another 15 minutes and then hung up!) Thanks

Hello HMRC team, could you please get back as I would like to complete the self assessment return? Thanks

Not HMRC...your property profit after expenses...£12k falls within personal allowance as first assessable source, therefore no tax due on this source, therefore no tax relief due on interest paid as cannot be relieved against other sources...c/fwd

Hi Clive, that is so insightful, thanks so much!! Do you know why it would pick the rental profits as the first assessable source, and not the interest income as first assessable source? Theoretically, if there was PAYE income from employment, would this come first for the Personal Allowance deduction and thus there would be a tax deduction for finance cost? Thanks so much again

Its the way the allowances, bands and rates are designed. PAYE/Property/Self employment etc are liable at standard rates of tax, other sources...bank int and dividends have their own rates and/or separate exempt amounts depending on amounts. Therefore, anything that isnt subject to "variations" is considered first. The calculation cant pick up the interest as first assessable source as it is subect to savings allowance in addition in some (not all) circumstances (dont get savings allowance when other income is above certain limits) and its got its own small exemption. Theoretically, yes, if PAYE or self employed income this would use personal allowance as earned income takes priority over property (investment income) and property income would be charged so tax credit due.

Thanks a million Clive! This is immensely helpful.

Hi lookingforhelp,
As the rental income is covered by your personal allowances, no income tax is due on this source and as such no tax relief is due for the finance costs.
Thank you.