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How allowable is interest on a loan taken out after property purchase?

I have a client who has taken out a substantial loan. He rents out property but the loan is not secured on any particular property. There are no other loans.

What are the conditions to “link” the loan to the rented property?

I’m aware of the possibility of withdrawing property capital a/c by way of a loan and getting relief for the interest on the loan up to the value of the capital a/c.

Can any loan be linked and deemed as a loan for the purchase of the property? Given that the loan is taken out several years after the initial purchase, there is no actual flow of funds from the loan to the purchase of the property. It all seems rather nebulous, so I’m struggling to see how one can say “this loan is for the withdrawal of the capital from this rented property”. Or to put it another way, what would prevent a loan being linked?

By the way, the initial purchase was not funded by any loans.

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Struggling

I agree that this client should be able to borrow to repay his capital account, however, i would have expected the borrowings to have been secured on the rented property to obtain the tax relief.

 

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07th Nov 2012 14:08

common sense

Yes, that sounds like the common sense approach and sounds "right".

The only thing is that where a client borrows against the security of property A in order to purchase property B, the loan interest is allowable as long as the funds were used to purchase property B. Not the same as my case but still...

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By Old Greying Accountant
07th Nov 2012 14:49

Where did he get ...

... a substantial unsecured loan?

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07th Nov 2012 14:58

@OGA

He has substantial stock market investments. The loan was secured against that, though not used to purchase shares.

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Never an easy topic

Hi RL - firstly the property or asset (if any) on which the loan is secured has no relevance to whether the interest is allowed, the rule is, like any business expense, was the interest incurred wholly & exclusively for the business, this may not necessarily be the same as the purpose for which the loan was taken out.

In your case, there is no link with the property business and the purpose for which the money was used to incur the interest is also not for the purpose of the business and so, as guessed, it's not allowed.

For chapter and verse and a lot more have a run through this thread from a few months back, and in particular the 2 examples from BIM manuals 45690 & 45700.

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08th Nov 2012 11:08

@Paul

HI Paul,

Thanks for the link, though I do feel like I've disappeared up my own fundament!

What's your view if the letting business has a capital a/c of say £500k and subsequently takes out a loan of £500k? There is no separate lettings business bank a/c. The loan funds simply go into the general pool of funds and go wherever they might. Say a few weeks later £400k gets spent on a vintage Ferrari.

To anticipate your possibly negative reply (please bear with me!), in what scenario can withdrawal of the property capital a/c ever end up with allowable interest?

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Case by case

I know what you mean, just think yourself lucky I didn't link the other similar posts there have been in the past year or two.

I think it has to be looked at on a case by case basis.  My view is that, at the end of the day, this is no different from any other business.  If my self employed client has traded for a few years and has a positive capital account from undrawn profits and assets injected then there's nothing wrong in the business taking out a loan to enable some of this to be taken out.

Without a history of proper accounts and balance sheets though and certainly without a business bank account I think you'd find difficulty as HMRC would say "the prime purpose of the laon was personal - tough".

 

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