Income Tax (Trading and Other Income) Act 2005 section 307D

Cash basis: modification of deduction for costs of loans

Section 307D restricts the amount of loan costs that can be deducted when calculating property business profits under the cash basis, where the loan exceeds the value of the property to which it relates.

• Where a loan exceeds the property value, the deductible loan costs are reduced by multiplying the full deduction by the fraction: property value divided by total loan amount
• The "non-adjusted deduction" is the loan cost deduction that would otherwise be allowed before applying this restriction or the residential finance cost restriction
• The relevant fraction uses the same property value (V) and loan amount (L) as defined in section 307C, so only the proportion of loan costs attributable to the property's value is deductible
• For loans relating to residential properties, the restricted deduction is then subject to a further limitation under the general residential finance cost restriction rules