Adjusted Net Income - deduction for residential property finance costs

I'm trying to calculate my Adjusted Net Income for tax free childcare purposes. I'm looking at the guidance here: https://www.gov.uk/guidance/adjusted-net-income I have some income from UK property. The guidance says 'some rental income' should be included in the adjusted net income calculation. What figure should I include in my net income for the money from rental property? I assume the basic calculation will be income less allowable expenses. But how does the tax relief for residential property finance costs ( https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies ) feed into my adjusted net income? Should I take finance costs off my income, and if so then in what stage of the adjusted net income calculation?

I am trying to calculate my Adjusted Net Income for establishing if I am likely to be over the £50k threshold for recieving the full child benefit. I too assume like Jimssen that I can deduct allowable expenses, but I am unsure if we are allowed to deduct anything for residential property finance costs? Please can you confirm?

Hi Jimssen,
From my understanding of your question and the attached adjusted net income guidance, following step 1- work out your ‘net income’, this section would include your Gross rental income, i.e. total rents and other income from property, then deducting any insurance, repairs, legal & management costs etc.
When looking at the tax relief for residential property finance costs, this is dealt with separately from other expenses incurred.
In the example that you are in a position where a profit has been made on rental income and have exceeded the personal allowance where residential property finance costs incurred are £200, the relief due would be 20% of the finance costs, so in this case would be £40. This would then be included in the net rental profit figure.
Thank you.

 

@HMRC Admin 20, thanks for clarifying that when calculating Net Adjusted Income it is possible to deduct the relief on residential property finance costs (20%).

Hi,

Since the 2020 to 2021 tax year, interest on mortgage payments or residential finance costs are not allowable as expenses.

They are instead used as a  reduction to your tax liability at 20%. For example, £1000 interest costs x 20% = £200. Your overall tax bill is then reduced by £200.

Regardless of your total income you are only allowed relief at 20%.

You can find guidance on how to work this out here:

Tax relief for residential landlords: how it's worked out

Thank you.

@HMRC Admin 2 , did you include guidance on how to calculate the tax relief on residential financial costs, so that we know how much to deduct when calculating our Net Adjusted Income [when calculating whether we are entitled to child benefit]?

Hi,

You can find guidance on how to calculate adjusted net income and tax relief on residential finance costs here:

PIM2058 - Deductions: interest: restriction for income tax purposes from 2017/18: calculation

Thank you

Hi @HMRC Admin 2 - I think that may be a reference to the wrong guidance. PIM2058 seems to refer to the calculation of Adjusted Total Income for the purposes of s23 Income Tax Act 2007. That calculation is used to calculate liability for income tax. This thread is about adjusted net income, which is a different concept used to calculate eligibility for child benefit and childcare. The test is set out in s58 Income Tax Act 2007. So I think you have linked to the wrong guidance. Could you respond or edit your post to clarify please?

Hi not hmrc admin but residential finance costs do not reduce your adjusted net income. So for the purposes of calculating adjusted net income, you ignore the finance costs.