Tax enquiry issue - addback of mortgage interest on guesthouse

Tax enquiry issue - addback of mortgage...

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I have a soletrader client who purchased a guesthouse (about 12 bedroom) a few years ago. He borrowed about 80% of the guesthouse cost and introduced personal money to cover the rest. I have allowed all of the mortgage interest in the accounts. HMRC disagree and want to add back a % based on the number of non-business rooms. I have argued that the client has only borrowed against the "business" and there should be no addback has he has already contributed £100,000 of his own money to cover the personal amount.

Any suggestions?

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By DMGbus
24th Aug 2011 13:39

Dixon vs HMRC case

In my view HMRC's challenge is supported by the Dixon v HMRC SpC 511 case that was published around early 2006.

Were it not for the Dixon case I would support the proposition that in the circumstances outlined there should be NO add back (on the basis of logic and fairness).  The Dixon case dismissed the concept of logic and fairness and instead supported HMRC's contrary more literal interpretational view on the matter so some of the interest paid had to be added back.

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By DMGbus
24th Aug 2011 13:42

More details on the Dixon case

Decisions 2006/Dixon v Revenue and Customs Commissioners - [2006] STC (SCD) 28

SpC 511

SPECIAL COMMISSIONER: MICHAEL TILDESLEY OBE

extract as follows:-

Held - The taxpayer bought a package comprising a business with a home for a single

price, and the mortgage was taken out to facilitate the purchase of the whole package,

not just individual parts of it. Accordingly, the purpose of the mortgage was to purchase

a parcel of assets which were the business assets associated with the newsagent and

shop and the private dwelling house. The taxpayer took out the mortgage to meet the

shortfall between the purchase price of the business and the market value of his former

residence and the purpose of the mortgage was to facilitate the purchase of the whole

 

package rather than two separate properties.

As a result, even though money introduced sufficient to cover the whole cost of the

private residence element of the transaction, part of the loan interest was to be

disallowed - a wholly unfair result that might have been knocked into touch had a

separate contract been arranged for the purchase of the freehold element paid for out of

personal funds. 

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By justsotax
24th Aug 2011 14:08

could you not argue

that the personal money introduced (effectively the 'deposit' for the property) could be argued to facilitate the purchase of the 'whole package' and that the loan was used to purchase the business.....presumably it is some sort of business loan, secured against the business and is not just a personal loan? (In which case does it say anything to suggest that is secured against the 'personal' element of the property...or does it just state 'business' in the loan agreemeent)

I am not disagreeing with DMG ....just finding some argument to justify claiming in full - and presumably they haven't quoted the dixon case at you yet, so they may not be depending upon that case to carry this adjustment through.

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