Restriction of Interest relief as a deduction against Rental Income

Interest accruing on or after 7 April 2009 on borrowings taken out to purchase, improve or repair rented residential premises will be restricted to 75% of the deduction which would otherwise be available as an expense against residential rental income.

Residential premises are defined as premises in use as or suitable for use as a dwelling. Therefore, the restriction will have greater application than just to rental premises actually used for residential purposes. The restriction will not extend to commercial premises. The interest restricted is not available to be carried forward. It is effectively lost as a deduction. The restriction will extend to restrict interest deductions for individuals and companies. The new provisions also provide that in applying the restriction, any borrowings on the purchase of a site on which a rented residential premises is constructed, will be subject to the restriction as well as the borrowings on the construction of the premises itself.

Where a premises consists in part of a residential premises and in part of a non-residential premises, the restriction will apply to that part of the borrowings on the premises that are attributable, on a just and reasonable basis, to residential premises.

Interest on borrowings used to purchase, improve or repair foreign rented residential property is also restricted from the 7th April 2009.

Example:
John acquires a residential property for letting on 1 January 2009. John took out borrowings of €600,000 to acquire the property and the property was first let to a tenant on 1 March 2009. The interest accrued for 2009 was €24,000. The interest deduction available to John for 2009 will be:

• 1 January to 28 February 2009 – Nil (property was not first let);
• 1 March to 6 April 2009 – 37/365 × 24,000 = €2,433
• 7 April to 31 December 2009 – 269/365 × 24,000 × 75% = €13,266.

The effect of the restriction on John is a loss of interest deduction of €4,422.

For further information please contact Niall Dempsey