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Loan interest on let property

Client extended mortgage on own residence to raise a deposit on their first let property.  A buy to let loan was used for the remaining capital.

Mortgage interest has been claimed on the amount of interest paid on the additional borrowings on their own home that was used for the deposit.  HMRC say the deposit mortgage loan on their own property which is not let is not allowable. 

The additional borrowings were used wholly and exclusively for the purchase of the let property so shouldn't this be allowable?.  The loan interest has been apportioned so nothing has been claimed in respect of the purchase of their main residence.

HMRC is also disallowing the buy to let fees as these are included in the buy to let loan and have been "capitalised and therefore included in the loan relief claimed". The loan relief claimed is only for the interest paid on the loan .  I believed incidental costs of arranging business finance is allowed so the cost of these as well as the loan interest should be allowed.

Client has dealt with this themselves up till now so not sure if HMRC's decision is based on how client has put it to them.

Before I reply to HMRC I would like to be sure that the mortgage interest on the deposit is allowable and that the cost of the buy to let mortgage fees can also be claimed.  Does anyone agree?

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By BKD
01st Apr 2012 19:00

I would suggest that HMRC are wrong on the first point

Provided it can be demonstrated that the extension to the main residence was for the purpose of acquiring the buy-to-let, that part of the interest should be allowed. Ask HMRC to cite the authority for disallowing it.

On the subject of fees, HMRC may be correct. If, as is common, the fees have been added to the loan, then there is no deduction in the P&L on which to claim relief (the position may have been different had the borrower been a limited company).

 

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02nd Apr 2012 08:23

This should be fairly straight forward, so I am wondering why it isn’t.

My own view is usually:

The loan interest on the funds obtained via remortgage of the client’s own home should be allowable but by financing in this way the client needs to be aware that any HMRC person who is “on the ball” may require convincing evidence the funds were used for purchase of the buy-to-let property.  Unlike the buy-to-let loan, which is given for a specific and well documented purpose, the proceeds of a remortgage are generally not.

The lender’s administration charges are usually an allowable expense; that is, the lender invoices/asks for the charges to be paid and the borrower pays them.  At this point, the borrower could claim these as expenses or not claim and capitalize the expense.  In allowing the charges to be “rolled” into the buy-to-let loan and paying interest on them, the borrower has effectively relinquished his choice of treatment.  It could be argued that the client has not actually paid the charges (so should not be able to claim for paying them) – after all - that is why they are paying interest.

Your comment that the client has dealt with the matter themselves “up till now”  is perhaps most telling and leads me to ask two questions:

Why (how) is it they came to you?Why were/are they in communication with HMRC anyway?

Or to put it another way – has the client tried to be too clever and messed up something that should be straight forward?

I hope this helps.

tladirect

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02nd Apr 2012 10:49

being too clever

tladirect wrote:

This should be fairly straight forward, so I am wondering why it isn’t.

My own view is usually:

The loan interest on the funds obtained via remortgage of the client’s own home should be allowable but by financing in this way the client needs to be aware that any HMRC person who is “on the ball” may require convincing evidence the funds were used for purchase of the buy-to-let property.  Unlike the buy-to-let loan, which is given for a specific and well documented purpose, the proceeds of a remortgage are generally not.

The lender’s administration charges are usually an allowable expense; that is, the lender invoices/asks for the charges to be paid and the borrower pays them.  At this point, the borrower could claim these as expenses or not claim and capitalize the expense.  In allowing the charges to be “rolled” into the buy-to-let loan and paying interest on them, the borrower has effectively relinquished his choice of treatment.  It could be argued that the client has not actually paid the charges (so should not be able to claim for paying them) – after all - that is why they are paying interest.

Your comment that the client has dealt with the matter themselves “up till now”  is perhaps most telling and leads me to ask two questions:

Why (how) is it they came to you?Why were/are they in communication with HMRC anyway?

Or to put it another way – has the client tried to be too clever and messed up something that should be straight forward?

I hope this helps.

its surprising how often clients think they know best and think they are correct when they file/deliver to you neat and tidy claims

loan interest/finance costs can be claimed according to the reasonable/appropriate lending rate on a loan taken out to buy or improve a let property.

 

so if the purchase cost of the property was 75000 with a 60,000 buy to let loan and 15000 deposit your client will be entitled to claim the interest cost attached to the full value of the property, but like all inspectors, the inspector didnt look at the rules  only a claim based on documentary proof.

 

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02nd Apr 2012 12:30

Revenue guidance of cost of finance

http://www.hmrc.gov.uk/agents/toolkits/property-rental.pdf

 

page 12 point 8. In my opinion the arrangement fees have always been an allowable expense.

The inspector is being unreasonable. It doesn't matter if your client decided to use the mortgage funds to pay the fees (add to borrowing) rather than pay them personally.

 

As to the mortgage deposit I would suggest you should try and prove the audit trail of the funds released on the main home and being used ad the deposit which should prove the interest is allowable.

 

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