mortgage interest

mortgage interest

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Are there any circumstances when it would be justifiable not to disallow mortgage interest for purchase of a hotel where there is private accomodation? The purchase included goodwill and there was a deposit paid of 30%. The Revenue is seeking to disallow 15% based upon the proportion of private rooms to total. There are considerable reserves so the loan is not funding drawings.
Paul Turner

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By User deleted
11th Jul 2006 23:10

Recent case
A recent case that does NOT help getting the full tax relief is : Dixon v Revenue and Customs Commissioners
SpC 511 [2006] STC (SCD) 28

This case concerned a house and newsagents bought at the same time : SPECIAL COMMISSIONER: MICHAEL TILDESLEY OBE decided that HMRC were correct to disallow a portion of the loan interest despite the loan being less than the value of the commercial element of the total property.

This seems to be harsh and in contrast with the current HMRC published generous practice re: Buy to Let / Property Rental businesses where tax relief is allowed on the interest on loans upto the value of the purchase price of the property, even if capital is withdrawn from the property business for non-business spending. HMRC Business Income Manual at BIM 45700 refers to this tax break for property market investors.

So, how can the whole of the interest be relieved ?

Maybe operate through a Ltd Co - BUT the directors will have a BIK of free accomodation and the tax on the property's capital gain could be quite a lot higher than if the property were owned personally.

Maybe try to( but unlikely to be possible in many cases?) buy the domestic part of a business in a separate contract and pay cash for this, and by separate contract buy the business element and have the loan wholly allocated to this aspect with all documentation making it abundantly clear that the loan was for nothing but the business element. This might have worked for the newsagents case, but the taxpayer was unaware that Special Commissioner Michael Tildesley OBE would find in favour of HMRC at appeal so the taxpayer did not have the opportunity to arrange his tax affairs to maximise tax relief. However future business purchasers can study the Dixon v Revenue and Customs Commissioners
SpC 511 [2006] STC (SCD) 28 case and plan accordingly if circumstances permit.

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