Property Allowance and Tax Reduction

When working out tax on rental income I understand there are a number of deductions available - Property Allowance of £1,000 or Allowable Expenses - 20% Tax Reduction for Finance Costs Therefore in the situation of Rental Income = £10,000 Finance Costs = £2,000 Allowable Expenses = £500 Would Income Tax then be calculated on Rental Income - Property Allowance (£10,000 - £1,000) OR Rental Income - Allowable Expenses (£10,000 - £500) And there would also be 20% Tax Deduction on Finance Costs of (£2,000 * 20%) Are all these calculated automatically on the Tax Self Assessment Form as I have found that unless one inputs the Property Allowance of £1,000 it is not deducted. Also the 20% Tax Deduction is not calculated as can't find where to put the Finance Costs on the form.

Hi,
 

Thank you for your question. Firstly if you are completing an online SA return you can claim property income allowance or expenses whichever is the greater. interest on the mortgage is entered in 'residential property finance costs'. The finance costs is a tax reducer not an expenses. Therefore you should enter your total rents minus your total expenses(without the mortgage interest). This will give you a net profit figure. Once you enter the interest figure in the finance costs box the sysytem will automatically calculate 20% of that figure and reduce your OVERALL tax liability accordingly. You do not need to do anything further. I have attached some guidance that may help : Tax relief for residential landlords: how it's worked out Thank you

Could I please double check here that I can claim both the property allowance and also relief for residential finance costs (as a 20% tax reducer) as I have been directed to PIM4460 https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim4460 which states that it is one or the other? Thanks

Hi Alex Barry,
As per PIM4460, you are correct, you may either use the £1000 Property Income Allowance or claim for expenses such as residential finance costs, whichever is more beneficial to yourself for that specific tax year.
Additional guidance which may be helpful for your situation is attached below: Tax-free allowances on property and trading income.
Thank you.