Is the interest allowed?

Is the interest allowed?

Didn't find your answer?

I own 2 rental properties which I bought outright using my savings in 07/08.

I have been told that I can claim the interest on my personal mortgage as a rental expense, is this correct???

Thanks in advance.
Robert

Replies (21)

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By User deleted
21st Jan 2009 17:11

Correct Penny
I'm not even going to pretend that I read the question properly either.

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By User deleted
21st Jan 2009 12:53

But, Fellowcraft ...
presumably in your client's case the advance on the main residence mortgage was fresh borrowing to part-finance the BTL property. In this particular case the questioner is referring to interest on the original mortgage - taken out for the sole purpose of acquiring his residence - therefore not allowable

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By User deleted
21st Jan 2009 12:32

Yes, allowable
I'm not going to pretend that I have read all the responses below, however I recently concluded a tax enquiry on a client in these circumstances.

She had financed the BTL property 50% from a residential mortgage advance and 50% on BTL mortgage.

The Inspector agreed that the interest on the advance was allowable against the income.

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By User deleted
20th Jan 2009 16:43

Confirmed
The original mortgage was taken out for the purpose of buying a non-qualifying asset - fact, and so the interest is not relievable. (I am not certain, but believe that it would have been had that particular property been transferred to the rental business).

Although it would appear that the proceeds of a re-mortgage are being used to repay the original mortgage, for accounting purposes this is not the case - you are using your own funds (ie your capital account) - exactly the same position had you used your savings to do the same.

It is probably unwise to think of matters in terms of simple and complicated options - more correct to think of tax-efficient and not-so-tax-efficient alternatives - you chose the latter. Perhaps some good professional advice at the time would have been cost-efficient?

Although many contributors here are happy to offer free advice, questioners who chose not to pay for good advice at the appropriate time should not be upset when they find out that subsequent advice gives them an answer they don't want to hear.

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By User deleted
20th Jan 2009 14:57

Thanks - to clarify
If I had used my savings to pay off my mortgage and then remortgaged what I had just paid off and used the money to buy the properties...

the interest would have been allowed?

But because I chose to go down the simple route, it is not.

And...

the only way I can get the interest allowable is to remortgage the buy to let properties even if I use the money to pay off my own mortgage?

Can someone confirm my thinking.

Very confused!

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By Malcolm Veall
20th Jan 2009 09:46

Can be "on" any property
But remember, the point is that the mortgage does not have to be "on the BTL" - the mortgage can be secured on the landlord's own home but the interest is still allowable against rental income from another property.

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By User deleted
19th Jan 2009 10:18

I stand corrected...
Humble apologies to all.

I have now had a look at the detailed guidance on this, and concur with Penny...

I was wrong (which doesn't happen that often! :-)).

So in summary, interest relief currently due? No.

Mortgage on BTL property (up to value when business of property when business commenced) - interest allowable.

I have learnt something new today!

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By User deleted
16th Jan 2009 16:55

Alan ....
yes, agreed 100%

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By ACDWebb
16th Jan 2009 16:40

But would you agree that
in the context of the original question no relief will be available for interest paid on the personal mortgage.

To get relief a refinance is required to draw the capital out of the letting business and replace that with funds from the refinancing loan. The capital drawn out can then be used to repay the personal mortgage.

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By Malcolm Veall
16th Jan 2009 15:54

Penny is right
I cannot add anything to what Penny has said except point out to readers of this thread that she is not in a minority of 1, she is exactly right.

The only restriction is that you can only claim interest relief on borrowings up to the level equivalent to the value of the properties when they were first let, (ie when the Dr Asset Cr Capital entry was made).

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By User deleted
16th Jan 2009 15:00

And I stand by my comments
First off, we may be talking about property income, but business inome principles now apply to to Sch A computations - that is why the BIM example is relevant.

I do not disagree that in principle a loan taken out for private purposes will not attract interest relief. But your confusion is in claiming that the new loan is for the purpose of paying off an old mortgage - it is not. The old mortgage will have been repaid from available capital in the business. The new loan, providing the capital account is not overdrawn, is wholly for the purposes of financing the business's capital, in this case the acquisition of the property for the Sch A business. The fact that the loan was taken out after the Sch A business started does not detract from this fact. This applies to all business, property or not.

To try and explain the common sense behind all of this (though I do acknowledge that in otehe circumstances the sequence of events can have a particular effect):

Suppose the individual had borrowed to acquire the rental properties and at the same time deposited his savings in the Sch A bank account. Suppose then he ahd withdrawn his cash and paid off his mortgage. Would you allow interest relief? Of course you would. A different route but exactly the same end-position. Again, the confusion stems from the fact that you are expecting to see the funds used for a definite purpose, ie the purchase of qualifying property. This is not necessary - all you need to demonstrate is that the funds are financing the capital of the business.

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By User deleted
16th Jan 2009 14:39

OK... but
My example of the healthy balance sheet, and a trip around the world may not have been a great one. point taken.

However, we all looking at property income... PIM2105
(http://www.hmrc.gov.uk/manuals/pimmanual/PIM2105.htm)
and an extract...

Similarly, the interest on a loan or overdraft may not be allowable, or only part may be allowable, where the taxpayer, for example, uses the borrowing:

o to buy non-rental business investments (which may be shown in the balance sheet as assets),

o to buy private assets or assets for their family,

o for the provision of private funds to be taken out from the rental business.

Deciding what interest, if any, can be deducted may be difficult, particularly where the taxpayer’s account with the business is overdrawn. That is, where the taxpayer has drawn out more money than the profits of the rental business. The loan may have, for example, partly financed the rental business and partly met private living expenses. Interest on a borrowing that is used to fund private living expenses or other non-business expenditure isn’t allowable.

I stand by my earlier comment - private loan interest is not deductible.

If refinanced to a BTL loan - What is the purpose of the BLT loan proposed? To repay a personal mortgage. No relief due.

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By User deleted
16th Jan 2009 13:19

Robert
Common sense says you can. You lent the money for business purposes.

You could always refinance the BTL properties to the extent of the lower of either the amount you initially invested or the credit balance of your capital account, however the BTL interest rates may be prohibitive.

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By AnonymousUser
16th Jan 2009 12:15

Is the interest allowed?
The BTL properties were purchased with cash i.e. the proprietor is owed the cash via his capital account. If the BTL properties are remortgage at no more than the value on day 1 of the entry into the property business then interest paid is allowable in full as far as I am aware as the funds borrowed have been used to repay the owners personal funds. If they then choose to pay off their home loan with these funds then surely that is their personal choice.

I am personally unable to see anyway that you can claim the personal home loan interest against the rental income.

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By User deleted
16th Jan 2009 12:14

I disagree - interest is allowable
BIM45675
( http://www.hmrc.gov.uk/manuals/bimmanual/bim45675.htm )
Example 3 covers this situation

Example 3 does not cover this situation - example 3 is there to distinguish the fact that the nature of the security is irrelevant to the deductibility of the loan. Example 3, as I read it, deals with the case where a sole trader takes out a personal loan and secures it on a business asset. It is therefore manifestly different from the instant case.

In this case, the Sch A business has acquired an asset. Unable perhaps to borrow funds at the time, the business has 'acquired' the property from the individual in the form of capital. The business has subsequently borrowed to finance the acquisition of the property and there is no distinction between this and the other BIM example. It can still be said that "the interest on the mortgage loan is allowable in full because it is funding the transfer of the property to the business at its open market value at the time the business started." The fact that in that case there was a pre-existing mortgage is a red herring. In that case, further borrowing of £125k was raised and that £125k withdrawn for a specific, non-qualifying, purpose. Following the logic of BIM45675, interest relief on the £125k ought to be denied. HMRC say it is not.

And, yes, if someone has a healthy balance sheet why not indeed use available capital to finance personal pleasures? Provided further borrowings by the business are solely to finance capital of the business, and capital account is not overdrawn, interest relief is available in full - Silk v Fletcher.

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By User deleted
16th Jan 2009 10:56

I disagree... no interest allowable
Example 2 referred to below. Per the example, the interest is allowable because

"the interest on the mortgage loan is allowable in full because it is funding the transfer of the property to the business at its open market value at the time the business started."

Is this relevent to this situation?

No. Existing business with no current debt.

BIM45675
( http://www.hmrc.gov.uk/manuals/bimmanual/bim45675.htm )
Example 3 covers this situation.

Taking the argument that is being used here - why would someone in business with a healthy balance sheet ever borrow personal debt? Let's borrow it within the business, and get tax relief on my trip round the world.

Please.

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By ACDWebb
15th Jan 2009 16:54

Surely
you currently have

Capital account £375,000 Property at market value £375,000

On refinancing you get

Mortgage £205,000 Property at market value £375,000
Capital account B/F £375,000
Less Drawings £205,000
C/F £170,000

Sorry I doubt that lines up, but is a rewrite of the example

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By User deleted
15th Jan 2009 16:53

I disagree
Sch A profits are now computed on the same basis as Sch D.

If taxpayer chooses to borrow to finance his business he is at liberty to do so. Provided he does not overdraw his capital account there should be no restriction on relief.

This is somewhat analgous to the old ruse of a partner borrowing to increase his capital account, claiming relief and then withdrawing the same amount to repay a non-qualifying loan. That practice was effectively blocked, but the difference there was that the individual ended up in exactly the same positon vis-a-vis his capital account. Here, the individual is replacing capital with debt, which is manifestly different.

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By User deleted
15th Jan 2009 16:11

I concur
If the mortgage already existed then the equity was not used wholly and exclusively for your rental business and is not allowed. Who tolfd you it was and did they have all the facts. Regards Peter

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By User deleted
15th Jan 2009 16:11

I disagree..
See Property Income Manaul (PIM2105)

Interest is allowable depending on the purpose of the loan.

No relief currently due, and if you re-finance buy-to-let, in my humble opinion, I still don't think relief will be due as the purpose of the loan is to repay a personal mortgage.

the example below relates to re-financing where the original loan is on the rental property.

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By ACDWebb
15th Jan 2009 12:44

Possibly
but not if the mortgage pre existed the purchase of the let properties.

You might look at example 2 at BIM45700.

To get relief for the mortgage you will probably need to refinance to a buy to let mortgage of no more than the cost / value of the properties when first let and use those funds to repay your existing mortgage.

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