Interest and rental property

Interest and rental property

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I have just read the posts originating 12 March 08 about tax relief on interest for rental properties. I conclude that individuals can remortgage an individual property and take a larger loan providing the amount of the new loan does not exceed the value of the property at its first rental e,g. property value at its first rental £0.50M, value today say £1.0M, debt outstanding £0.30M. This would allow re-financing to get extra funding of £0.20M to buy personal goods - say a new Merc etc - and to get tax releif on the whole £0.50M.

My question is: whilst this applies to individual properties, is the value at first rental principle applied only to individual properties or can it be applied to a portfolio of properties considered as a whole? If the latter is acceptable to the Inland Revenue, and assuming the above figures apply to ten properties not one (ten x £100k each) can I remortgage just five properties (assuming I get 100% loans) instead of all ten? I am mindful that there are loan arrangement fees for each individual application, and wish to minimise these.
Peter Farrell

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By AnonymousUser
31st Mar 2008 13:29

Agreed
But the argument would be that revaluation reserve is just an element of total owner's capital along with original capital introduced.

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By Paul Soper
31st Mar 2008 11:16

A Question of balance
If you draw up a balance shhet for the business showing assets at the value introduced to the business then this will be financed by two things - loans and your own capital. Its a business decision for you what balance you have between the two. So as long as your capital account does not become overdrawn you can take money out of the business and replace it with loan capital.

If you revalue an asset the surplus is not a distributable reserve and os, from an accounting point of view should be credited to a revaluation reserve NOT capital account. This is where the revenue get the idea that you are restricted to the original value - but its not them its us accountants who are responsible. All they are doing is following simple accounting theory.

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By AnonymousUser
31st Mar 2008 09:02

Yes
If there are 10 properties valued at £.0.5 million each at first rental with current debt of £0.3 million each, they each contribute £0.2 million of capital to the total owner's capital of £2.0 million employed in the business.

Therefore new debts of up to £2.0 million can be used to repay that owner's capital and income tax relief on all the interest will be available.

This is because repaying owner's capital is a business purpose. It does not matter which properties the new debts are mortgaged on (or whether they are mortgaged at all)

The restriction to value at first letting is an invention of HMRC. There does not appear to be anything in tax law to support a restriction below the value of the property at the time the new loan is taken out.

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