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Rental property mortgages

If a home is used as principle private residence and subsequently rented out. If a mortgage is secured against the rental property and used to buy a home for the client to live in. Would the resulting interest charges from the mortgage be deductible against tax?

Many thanks

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18th Feb 2013 21:48

In essence, a loan is being taken out (if I understand correctly) to fund the client's purchase of a house to reside in. Therefore the interest on the loan(mortgage) would not be tax deductible.

The fact that the loan is secured on a rental property is irrelevant.

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Not always straight forward

If you inject an asset into a business, thus creating a credit to your capital account, you are entitled to withdraw that capital, if necessary by borrowing money in the business, and claim the interest, as long as your capital account stays in credit.

Have a look at example 2 in this HMRC manual and also loads of other similar questions in the past, here's one to drink a coffee with.

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19th Feb 2013 06:35

Thanks all I will have a read

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19th Feb 2013 13:05

Rental property mortgages

Flagging

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By law man
19th Feb 2013 13:21

Business premises

The short answer is "No: because the purpose of the loan (secured by a mortgage of Blackacre) was to buy a house at Whiteacre for a private residence for the borrower.

 

If the purpose of the loan had been to buy Blackacre - where Blackacre is let to tenants as a business activity - then the mortgage loan interest would be tax deductible. As a starting point, you could set it off against the rental profits.

 

As I understand Paul S to be suggesting, look at ways of treating the loan as for the purpose of 'buying' Blackacre.

 

 

 

 

 

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19th Feb 2013 13:56

The loan will be secured against the rental property. As per the hmrc manual quoted by paul. Surely example 2 would mean that the interest would be allowable. Providing the client had the capital to offset the mortgage

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By ACDWebb
19th Feb 2013 14:23

The purpose of the loan

following the HMRC example, and presuming that there is free equity in Property 1 introduced to the letting business at the date of introduction, is withdrawal of the free capital and replacement of same with further borrowing. What you then do with the new funds extracted is up to you, but following the BIM example flagged by Paul the interest will be allowable against the rental income. The restriction is only to the value of Property1 when introduced to the letting business.

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19th Feb 2013 14:36

@Martin B

What do you mean by "flagging"?  Are you tired of this thread?

For what it is worth, I agree with everyone except the "man" respondents.  The interest can be claimed against the letting income, provided that the loan does not exceed the equity in the property when it was first let.

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25th Feb 2013 12:06

Interest on mortage re rental property

Euan MacLennan wrote:

What do you mean by "flagging"?  Are you tired of this thread?

For what it is worth, I agree with everyone except the "man" respondents.  The interest can be claimed against the letting income, provided that the loan does not exceed the equity in the property when it was first let.

They mean they are flagging it for future reference.  The only way to do that on AW is to make a memorable subject title and post in the thread, then you can go though your post list later and find it again.

A better way of doing it would be helpful, though I have no suggestions.

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By BKD
25th Feb 2013 12:27

Flagging

Constantly Confused wrote:

They mean they are flagging it for future reference.  The only way to do that on AW is to make a memorable subject title and post in the thread, then you can go though your post list later and find it again.

A better way of doing it would be helpful, though I have no suggestions.

What I have is a Word document into which I paste the link (using the Permalink feature) and post an appropriate narrative. I thus have a table of all potentially useful references - grouped by subject matter.

And of course for those comments that may need to be produced in Court (but which may have 'vanished' in the meantime) I simply save the entire thread as an HTML document.

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By VLH
11th Mar 2013 13:55

Pinterest

I wonder if you could flag it somehow using Pinterest - I find that useful instead of saving loads of favourites.

I don't know if it would work as to pin something you need an image so I'm not sure what it would make of a thread of conversation.

Might have a go...

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By VLH
11th Mar 2013 13:56

The answer is no!

Nothing pinnable - so we need pictures in our threads!

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@Euan/ACDWebb/andy4151

I disagree with the "man" respondents too, but I don't accept that you can simply raise a loan secured on (sorry, but I'm going to stick with the example) Blackacre and used to buy Whiteacre.

Paul and I had a similar exchange in the "coffee" thread he's referring to. If there are actual debits and credits to show that the capital has been withdrawn, I accept the position, but prima facie the capital remains in the business and a loan applied for private purposes has simply been secured on a business asset.

WRT equity in the property when first let point. That should be equity in the property when first let, less any capital subsequently withdrawn (plus of course any capital subsequently added). I accept they may be the same figure.

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19th Feb 2013 16:07

'Man respondants'
What are the "Man" respondents ?

I said, if I understand the question correctly.

I understood the question to be as follows :-

1. Person A rents a house out

2. Person A takes a mortgage out to buy a private residence for A to live in

3. The mortgage is secured against the rental property.

Are you saying that the interest on the loan to buy A's private residence can be offset against tax ???

That's a new one on me

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19th Feb 2013 16:20

"Man" respondents

You - Manchester_man - and law man.

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19th Feb 2013 17:18

Do a Balance Sheet

Prepare a balance sheet when the rental starts. You have a house as an asset (say worth 500K) and the related mortgage as a liability (say 400K) when you start letting the property out. You have therefore effectively built up a capital of 100K. You can top up your mortgage by another 100K (hypothetically - I know it becomes a 100% LTV) and spend it to buy a car, if you please, and still get the interest relief for this additional 100K against your rental income.

And Manchester_man, Euan is correct.

 

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Arrangement of finances

A motor dealer obtains a business bank loan to buy some vehicles and generally help out with business cashflow.  One of the vehicles ends up being withdrawn for personal use and s/he draws £2K for a holiday the same day the bank loan hits the bank account.

Unless the capital account goes negative I would not think of denying relief on the loan interest, even if the loan was secured on the person's home.

It's the interest you are claiming and it's spent at the time on business finances, regardless of security or where the funds finally end up.

As hkfinancials has mentioned however, it is important to evidence the situation properly and so you prepare balance sheets.  This has (or should have) always been the case in sole traders & partnerships with heavy finance.

I should just add that even a negative capital account may sometimes not result in interest disallowance if the deficit has arisen through bona fide trading losses.

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20th Feb 2013 09:13

.

Paul Scholes wrote:

A motor dealer obtains a business bank loan to buy some vehicles and generally help out with business cashflow.  One of the vehicles ends up being withdrawn for personal use and s/he draws £2K for a holiday the same day the bank loan hits the bank account.

Unless the capital account goes negative I would not think of denying relief on the loan interest, even if the loan was secured on the person's home.

It's the interest you are claiming and it's spent at the time on business finances, regardless of security or where the funds finally end up.

As hkfinancials has mentioned however, it is important to evidence the situation properly and so you prepare balance sheets.  This has (or should have) always been the case in sole traders & partnerships with heavy finance.

I should just add that even a negative capital account may sometimes not result in interest disallowance if the deficit has arisen through bona fide trading losses.

Well written and i agree that is correct.

"It's the interest you are claiming and it's spent at the time on business finances, regardless of security or where the funds finally end up"

This is also my understanding but the way I saw the question was that "the interest is NOT going to be spent on business finances - its going to be spent on a private residence unconnected to any business.

This is why i said I thought the interest should be disallowed. I think I've misunderstood the OPs question!

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By BKD
20th Feb 2013 08:31

Timing and destination of funds (and purpose) may be important

In HMRC's example, there was an existing mortgage, which was added to. The funds were then extracted and used for private purposes. But, in that example the mortgage funds were introduced to the business, albeit perhaps for a short time (unhelpfully, HMRC's example gives no indication of how long the funds were held for). Initially, therefore, the purpose of the loan was to introduce funds to the business.

In this case, however, it would seem that the funds raised were passed straight to the vendor. ie they never touched the business. There is no business purpose. One could draw up a balance sheet that showed the funds coming in and out, but that would be pure fiction.

But who's to say? HMRC may well accept a deduction consider the situation to be similar enough to their guidance. Equally, I would not be suprised if they were to put up a fight.

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By BKD
20th Feb 2013 09:36

Let's see if I've got this right

A sole trader of many years has built up a healthy capital account (but little cash). He's been renting his home for all those years but decides he now wants to buy a house to live in.

So he takes out a mortgage and buys the house - the mortgage funds pass directly to the vendor. Hands up all those that would claim tax relief on the interest?

The solution - draw up a (fictional) balance sheet showing the loan introduced to the business and capital drawn out? Somehow, I think HMRC would not be entirely happy with that.

Now, if the trader were able to raise the funds (but secured on what?) and introduce them to the business as a matter of fact, and then withdraw them, a different story perhaps. Point is that in many cases timing and order of events is crucial in acheiving the desired tax outcome.

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By blok
20th Feb 2013 10:19

.

bkd

If I understand the comparables in your post correctly, the difference is simply a single journal entry?

the problem is that, in practice, a number of these businesses won't have a balance sheet.

I do agree with you by the way.

 

 

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By asking
25th Feb 2013 12:41

Yes

loan interest is deductible. It is however limited to the interest on the value of the property at the point it was let.

Simples.

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By BKD
25th Feb 2013 13:09

?

asking wrote:

loan interest is deductible. It is however limited to the interest on the value of the property at the point it was let.

Based on what analysis?

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25th Feb 2013 12:51

two points

Firstly, does anyone remember Schedule A - for loan interest to be allowable (I seem to recall), the loan had to be used for the purposes of the letting (usually for the purpose of acquiring the property). That no longer applies under the 'new' lettings business rules. It is a major change of mind-set for us 'oldies'.

 

And secondly (although I am not an accountant), even without a Balance Sheet, where there is a property (let us say it is not mortgaged, keep it simple) in the letting business there is value (the proprietor's Capital Account) in the business - and then he/she borrows against the value of the property (to buy a holiday home in Great Yarmouth for personal use), and what becomes of the proprietor's 'value' (Capital Account) - has it not gone down by the amount of the borrowing (the Capital Account now being the net equity in the property)? Is that reduction of value not 'paid for' by the loan interest being paid? If that is all so, has the proprietor not withdrawn the amount of the mortgage from the letting business (even if the cash never went near the business), and is the loan interest not deductible within the business?

 

I have never been totally comfortable with the BIM explanation and examples (I was after all brought up on Schedule A), but the above is how I understand interest relief should now be given.

 

Whether the interpretation will change over time, only time itself (and HMRC) will tell us.

 

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By BKD
25th Feb 2013 13:21

@grahamw11

I agree with your analysis. However, the point I have made - which distinguishes the OP's case from HMRC's example - is that both the asset and the borrowings need to be introduced to the letting business (as is the case with HMRC example). My difficulty is with the concept that mortgage funds - passing directly to the vendor of the private asset - can in any way be said to be related to the business (see my trading example above), other than by way of an utterly fictitious journal entry. But who am I to say that an Inspector will be able to see the subtle (but in my view, vital) distinction?

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That was my point too...

... nearly a week ago now, but it seemed like a lost cause, having got lost amongst a technical analysis of BIM45700, not directed at the OP.

If the funds never entered the business, they can't very well be said to have been withdrawn as capital. You just have personal finance secured on a business asset.

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By asking
25th Feb 2013 14:38

the loan

Its secured against the business asset introduced.

Its introduced at mv at the point its first let.

what you do with the money drawn down is your own business, nothing to do with whether the interest is deductible or not.

'you have personal finance secured on a business asset'

You have introduced a business asset and you have introduced the associated finance on the business asset. Therefore you take a deduction for the relevant interest charge.

Its fairly straight forward to me but I appreciate I am coming at it from an 'its obviously deductible' point of view.

At the end of the day the interest is deductible and HMRC agree that it is too.  as per the links to HMRC manuals etc above.

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By BKD
25th Feb 2013 15:04

Step by step

Its secured against the business asset introduced.

Perhaps, but irrelevant

Its introduced at mv at the point its first let.

What is introduced? The asset, yes, but the finance? Explain how, in the scenario I have described, the finance has been introduced to the business.

what you do with the money drawn down is your own business, nothing to do with whether the interest is deductible or not.

Agreed, but you can draw down money only if it has been introduced in the first place.

You have introduced a business asset

Agreed

and you have introduced the associated finance on the business asset

Disagreed. Per above, please explain how the finance has been introduced

At the end of the day the interest is deductible and HMRC agree that it is too.  as per the links to HMRC manuals etc above.

No they don't. There is a significant difference between HMRC's example and the situation of the OP (and my own - and George's - example). (Though you may get an Inspector who, like you, doesn't seem to understand that difference)

EDIT - posted at the same time as George who, for the time being at least, seems to be on exactly the same page as me

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So...

... since it doesn't actually matter what asset the loan is secured on, the logical extension of your view is that:

having introduced a property into my rental business several years ago (not subject to any mortgage) at a value of £200K.now wanting to purchase a new house and I need another £200K loan, I can secure that loan on the new house, and just say I've withdrawn my £200K from the business (even though the funds involved have gone nowhere near the business), and claim tax relief on it?

Because the only difference between that and what the OP has done is the OP has the loan secured on the business asset. The funds raised seem never to have entered the business in order to be withdrawn.

I accept that, if the business receives the loan finance (even in my example above) and then it is withdrawn to fund the purchase, the interest is allowable.

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25th Feb 2013 14:59

by George I think you

have got it....hmmm...well thats my understanding which you seemed to explain perfectly....

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Actually BKD...

... I think what the OP has done is the same as your example (and mine), with the exception of identifying which property the loan is secured on (which isn't really relevant, as you say).

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25th Feb 2013 16:45

borrowing within the business

As I said before, I am not totally comfortable with the interest being allowable, but can someone tell me how Mr A (in HMRC's example 2 in BIM 45700) introduced the new loan of £125,000 (or indeed the original mortgage of £80,000) into the business? Did it go into a rental business bank account (I suspect that Mr A doesn't have such a thing, and HMRC do not mention this a prerequisite for getting interest relief)? HMRC appear to assume that the charging of the borrowing against the property somehow attaches the borrowing to that property (and therefore means the amount borrowed automatically becomes part of the business) in legal terms.

 

If we don't accept that interest on the new borrowing is eligible for relief against the rental income, then can someone explain how the interest on the original £80,000 ('introduced' into the business with the flat now being rented out) can be eligible for tax relief? As far as I can see, that original borrowing is no more (and perhaps no less) relevant to the rental business than the new £125,000. The £80,000 was not expended on the acquisition of a business asset - when the £80,000 (plus Mr A's own deposit) was spent, it was spent on acquiring Mr A's private residence (which he is now turning into a rental property).

 

Or, perhaps Mr A's 'original' mortgage was £35,000 when he bought the flat, but he subsequently increased the mortgage to £80,000 (while still living in the flat as his private residence). So, when he comes to move out and stars renting the property, can he only claim interest relief on only £35,000 of his borrowing. Maybe HMRC are taking a pragmatic view (whatever one of those is).

 

Personally I would forget the logic of it, and forget the legal interpretation of the facts: HMRC appear to be saying that the further borrowing secured on Mr A's flat will be eligible for tax relief (against the rental income). And, as I said before, whether [HMRC's] interpretation will change over time, only time itself (and HMRC) will tell us.

 

HMRC suggest that the relief is available - why not claim it?

 

 

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By BKD
25th Feb 2013 17:22

It's all very simple, Graham

Look at the wording in HMRC's example. They say that the existing mortgage was effectively increased and then some of the funds were drawn down. By implication, the taxpayer received the extra funds - it doesn't really matter if they were put into a designated business account or not. The key point is that he received the funds, which is fundamentally different to the case where a lender transfers funds directly to a vendor.

Tax relief is available on the £80k loan because from the point that the property is transferred into the business, the loan is being used to finance that business asset. Note also that the mortgage is not the same one - it has been converted into a new BTL mortgage, effectively new borrowing for a new, business, purpose.

The fundamental difference that you and others seem to be overlooking is that in HMRC's example the taxpayer receives the funds from the extended mortgage, whereas in this case (presumably) the mortgage funds go nowhere near the taxpayer. We keep returning to the same point that although the commercial end-result may be the same, how you get there can make a huge difference for tax purposes.

EDIT - again being composed whilst George was doing his thing

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By asking
25th Feb 2013 16:59

loan is secured on

Are you saying you can have a loan secured on your personal residence and take relief for the interest charge against rental income on another property? (with the aid of accounting entries).

My understanding is/was the loan will need to be secured on the property rented out. (the business property) I am doubting this is the case on the basis of what your hinting at but need to drill down into the detail.

As your both saying the same thing I will look at it in more detail.

Thanks for the detailed analysis above and pointing out how I dont understand tax.........!

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25th Feb 2013 17:00

isn't it just

the fact that the individual has introduced a capital item to the business (the property) at that particular value, and any finance raised against it that is for the enjoyment of the individual (in whichever way he wants to enjoy it) is merely a repayment of his capital introduced for business purposes, hence why the interest is allowed. 

 

Have i missed the point or is it just that simple?!

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@grahamw11 (originally entitled OFFS)

The £80K was used to purchase the asset (that didn't used to be but now is) the business. Both the asset and (as in consequence) the loan used to purchase it have been introduced to the business, as a matter of fact.

He can't claim the interest that arose on the loan, before the asset was the business, but now that it is the business, that's exactly what he can do. It's a completely different situation to the OP.

The words you need to focus on are "He withdraws the £125,000, which he then uses to buy a flat in Rotterdam." You can't withdraw something that wasn't there in the first place.

The use of the property as security is irrelevant.  A mortgage can be secured on a private property, and if it's introduced to the business in order to replace the proprietor's capital, then the loan interest is a business expense.

Forget what the loan is secured on; it's not relevant.  Did the OP withdraw any capital from the business, or did he just take a private loan using business property as security.

HMRC are making a specific point, that borrowing in order to replace the capital of the proprietor, which is being withdrawn gives the interest payments on the additional borrowing an allowable purpose. If you interpret the example as licence to go wider than that, you'll probably end up finding out that they don't agree with you.

"Personally I would forget the logic of it, and forget the legal interpretation of the facts." You go right ahead, but it's entirely logical and accords with the law.

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@asking

Not with accounting entries. You can't just dress things up with accounting entries.

It is legitimate for a business to incur interest expense on borrowing that has been used to replace the proprietor's capital, which has been withdrawn from the business.

So if you raise a loan, secured on personal property, and the funds then go into the business, allowing you to withdraw a corresponding amount, the loan has been used to replace your capital, so the interest is allowable.

Conversely, if you just take a loan and use it personally, then there's no withdrawal of capital from the business, and the fact that you've secured the loan on business property does nothing to change that analysis.

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25th Feb 2013 18:30

business borrowing?

So how do we determine whether money is in the business (so that we can withdraw it)?

If the borrowed cash has to be in the business in order for Mr A to withdraw it, how does that cash get into the business (in practical terms)?

Let us say that Mr A has gone to Holland, has put his London flat into the hands of a letting agent, the flat is let out, Mr A lives in a rented flat in Rotterdam for a couple of months while he finds his Dutch legs, then he decides to buy a flat in a leafy suburb of Rotterdam. He re-mortgages the London flat, but he has no 'business' bank account (the agent's net transfers are made to Mr A's personal current account). So Mr A cannot have tax relief on the interest on the further borrowing because he never introduced the borrowed money into the business?

If that is what HMRC are suggesting, then I think they should have made it a little clearer. 

George A says: 'The £80K was used to purchase the asset (that didn't used to be but now is) the business. Both the asset and (as in consequence) the loan used to purchase it have been introduced to the business, as a matter of fact.' But what about my example where the original borrowing was £35,000, and was added to during Mr A's occupation as his private residence? He used the extra borrowing (secured on his - at that time - private residence) to buy a yacht for personal pleasure. Now, at the time of starting the rental business, the loan includes £45,000 which was not used to purchase the asset (now a business asset), and in fact this £45,000 has gone nowhere near the business - so do we need to research the history of borrowings charged on the property where a rental business starts up with borrowings already in place?

My point about the legal interpretation was in respect of the mortgage being charged on the property. I would agree that, in legal terms, it is irrelevant what the borrowing is charged/secured on, but in practical terms if the borrowing is not secured on the rental property, then how do you demonstrate (to HMRC) that the lender has put the money into the business? If the proprietor borrows (secured on his personal holiday home in Cornwall) and puts the money into the business, I cannot see that you have achieved anything (the bank balance goes up and the proprietor's Capital Account goes up). As I see it, there has to be a direct connection between the money lent and the 'business'. 

 

 

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By BKD
25th Feb 2013 18:40

Do you mind, George ...

... if I borrow your 4-letter subject line?

 

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25th Feb 2013 18:54

funds transfer to a vendor?

In response to BKD, if he (the borrower, rental landlord) receives the funds, then they are his funds, his money. If he puts the money into the business, then he has increased the business bank account and also his Capital Account which, as far as I can see, gets you nowhere. Try setting out the 'T' accounts, and see what I mean. In order to achieve anything, the money must come into the business directly from the lender, not via the borrower.

As regards the purchase of the house to live in (in the original question up above here), why would the lender pass the money direct to the vendor? The borrowing is secured on the rental property, so why should the lender care what the borrower does with the money? And, in any event, in my experience the lender passes the money to the borrower's solicitor (in such transactions) so that the money is (theoretically) under the control of the borrower, and he (the borrower) has thus 'received' it.

 

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By BKD
25th Feb 2013 19:28

I despair

Since we are talking about the introduction to a business of borrowed money, with consequent tax relief on the interest, I suggest that you have another look at those 'T' accounts.

As for solicitors making available directly to the borrower the funds received from a lender in the course of a property purchase, that is certainly a new one on me.

No more from me - the bricks are starting to leave an imprint on my forehead.

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By asking
26th Feb 2013 12:23

despair?

This is long winded but I hope we are now on the same level. Bear with me.

I think what you have effectively been saying, albeit in a much more detailed way is the following.

1. The capital account will start off with the value of the asset introduced. Agreed

2. if there is a mortgage there already, it needs to be included and interest relief applies from that date. Agreed

3. the remaining capital introduced can be drawn down and if this is in the form of a loan (which it is always likely to be), then the interest incurred is an allowable deduction.

What you are effectively doing is financing the business asset introduced to the rental business.

I think everyone is ok to that point.

The important distiction in the HMRC example and what you are pointing to appears to be the following.

a. You can effectively borrow money from anywhere (i am still not sure i agree with this), as long as you get your hands on the cash - it can then, effectively, be introduced and withdrawn from your capital account and the resulting interest on the loan will be an allowable expense.

b Compare this with a situation where you purchase a new property with a mortgage (secured on the new property), the funds for which simply pass straight to the vendor, not to you first, Then in this case, as you havent (in practical terms) been able to 'introduce' and then 'withdraw' the funds then there is no relief.

I think thats the point. I am fairly sure you will correct something or other if its not spot on.

I can now appreciate your point re the funds .......

So if you raise a loan, secured on personal property, and the funds then go into the business, allowing you to withdraw a corresponding amount, the loan has been used to replace your capital, so the interest is allowable. 

.......having to go into the business - however I still come back to the point that this is simply an accounting entry in most cases as you wont have seperate business bank accounts for personal and rental etc etc. If you argue that on receipt of funds, your intention was the above (introduce and withdraw), how on earth can HMRC prove otherwise. Again, timing could be an issue but I think it will be the overall intention. If the intention is to obtain tax relief on the interest then the funds will have been applied to the business and withdrawn immediatley. (My opinion)

Back to the OP question - I go back to my original assertion.

Yes - tax relief is due, its very clear to me and although you have enlightened my understanding on the above points, in this case I still think relief is very clearly due.

The OP has raised funds by the use of securring a loan on his Let property. This is irrelevant but is an important distiction in this case. 

He will therefore have received the cash in his own bank account ( or at the very least into a solicitors client account) 

 THIS IS THE POINT FUNDS ARE EFFECTIVELY INTRODUCED TO THE BUSINESS

AND THEN WITHDRAWN

and then he will subsequently purchase a new property, which he so happens to live in. (It doesnt matter how you apply the funds raised.)

I cant see the issue in that. Tax relief is due on the loan.

The only difference betwen the op's question and the HMRC example is the way you are interpreting it. It is a fact that if the OP was mortgaging a let property or any property you ALREADY OWN outright - the bank wouldnt simply pass the money direct to the vendor of another property. the funds would come into his bank account - and then the next day, month, year, he goes and buys a property he lives in. (thats irrelevant)

The point at which the tax relief is due from is when the funds are received from the lender.

I know this works as I have done it myself.

Do you agree?

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By BKD
26th Feb 2013 11:52

No, I do not agree

Because I do not agree that funds passed into a solicitor's account (which is not under the control of the client) on their way to the vendor can be said to be under the control of the client and therefore introduced into the business.

The other point worth making - though not necessarily conclusive - is that in HMRC's example the mortgage in question was specifically a BTL mortgage, ie the purpose of the borrowing was perfectly clear. Although I think there is a good case that interest should be allowed on any addiitonal borrowing ostensibly taken out for the purposes of the letting business, I can easily imagine HMRC taking an alternative view.

If you've managed to successfully claim relief (and HMRC have indicated that they're happy with it) all well and good. Doesn't change my analysis.

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By asking
26th Feb 2013 12:20

A BTL or residential mortgage

A BTL or residential mortgage doesnt change the fact the property is let out - thats irrelevant. If you havent got a BTL mortgage on a property that is let out then that is an issue between the lender and borrower as its probably fraud or similar.

OK - I have attempted to give 'simple' analysis on it but you stick on the solicitor point! - take out the reference to solicitors account.

Instead - the mortgage funds it must be in your hands first, you agree then?

In the OP's example its not clear either way but in my experience of mortgaging a property 100% owned by me, the proceeds come direct to the borrower. It would be very unusual to mortgage a property you ALREADY own and for the proceeds to go to a third party or a solicitor - they come straight into your bank.

So in the OP's example - yes tax relief is due.

Thanks for the input - sorry I have to disagree on certain points, but thats the beauty of tax isnt it, grey areas, its where we can make a difference, sometimes!

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HMRC have created this by calling rental activity a business

 - as has been pointed out is it not really possible to introduce funds in to a 'business' that does not actually exist. But if you rely on Paul's interpretation of the 'Balance Sheet' for the business (which still doesn't exist) then you end up with the scenario of being able to get tax relief on a mortgage on your own home simply because somewhere you have a BTL asset with equity.

If tax relief (or our interpretation) is dependent on having a business bank account to introduce and withdraw funds (howsoever raised) just to tick the box then clearly the interpretation must be wrong. I conclude therefore that there is no problem with tax relief for the OP's interest claim.

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By BKD
26th Feb 2013 12:49

Agreement

Instead - the mortgage funds it must be in your hands first, you agree then?

Yes - because that is the point I have been labouring all along.

As for your experience re mortgages, that is all well and good, but that is because your scenario is more closely aligned to HMRC's example. My whole argument was founded on the assumption that the funds went nowhere near the borrower's hands. If they did, then of course the story changes.

You say that the OP's example is not clear, yet say categorically that relief is due. I'm prepared to alter my stance slightly and say that relief may be due, depending on the exact course of the transaction. (Although I'm not really moving at all, because nowhere have I said that the OP would not be entitled to relief.)

 

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I'm so bored with this thread

I still agree with BKD and don't entirely agree with Steve and the "it's that simple"s.

A great deal of reliance is being placed on a little bit of HMRC's guidance that doesn't deal with the point at issue directly. Anyone remember Gaines-Cooper?

If the OP has raised a new mortgage applied to purchase his new home and secured on a property in or that is his rental business, he may or may not have withdrawn capital from his business, and HMRC could require him to show it to be so.

If, as is likely, the funds passed directly from the mortgage provider to the person handling the conveyance of the new house, I'd consider it unlikely that HMRC (or a court or tribunal) would accept that the funds had been withdrawn by the business.

If the business did have its own bank account, I'd make sure they went in and came back out of that bank account.  If you use big bolts it won't fall off the [expletive moderated] wall.

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By blok
04th Mar 2013 16:47
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