is mortgage interest deductible?

is mortgage interest deductible?

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Client purchases house and moves in it. He rents his old house (PPR). Can he claim mortgage interest relief against rentals? New house was financed partly by mortgage on new house and partly by disposal proceeds from sale of a flat. Way complicated!Thanks.
james

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By NeilW
15th Nov 2005 11:16

Equity
What you need to do is draw up the balance sheet of the property business as a separate operation to the individual. If the realisable equity of the building introduced into the business is less than the size of the loan, then the entire amount of the interest is allowable in the business regardless of what the loan is secured upon.

Even the Revenue realise that it is not for them to determine what the equity/debt split is.

The argument you will have is what the equity value of the building is. They will push for a cost basis, and a revaluation reserve rather than introduction at its valuation when the property was first let.

NeilW

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By ACDWebb
14th Nov 2005 13:10

Need to check the circumstances
but see Example 2 at http://www.hmrc.gov.uk/manuals/bimmanual/BIM45700.htm which may cover what has happened in the instance you suggest and might mean relief is available

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By michaelblake
13th Nov 2005 22:07

no

Only interest aid on money borrowed using the rented property as security may beclaimed as a deduction from the rental income from that property.

The client could have borrowed up to the value of the old property when it was first let and used that money to buy the new property, and claimed the mortgage interest as a deduction from rents. If he did not do that but mortgaged the new property he cannot claim relief.

He could however mortgage the old (let) property and repay the mortgage on the new property then all would be well in terms of tax deductions (although the interst rate could be higher.)

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By User deleted
13th Nov 2005 22:09

Way complicated? The following should help
Yes, mortgage interest on the house that is being rented out will be allowed against the income.

Mortgage interest on the new property will not be allowed as a tax deduction against the new or old properties

The sale of the flat will be subject to Capital gains tax on the basis that Principle Private Residence [PPR] was at the house that is now being rented out.

Has owner elected which property he wants as PPR - rented property or new property. Property now being rented out may be subject to a CGT computation if owner elects (within 2 yrs of obtaining second property) to have the new property as PPR. However, letting relief will be available. If owner elects to have rented out property as PPR then new house will be subject to CGT. If owner does not elect, IR will 'assess the matter' on basis of actual facts.


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By AnonymousUser
14th Nov 2005 08:14

Why is the interest incurred?

The client could have sold the old house and used the funds to buy the new house.

He did not do that but borrowed funds so that he could rent the old house out. If he did not rent the old house out but sold it he would not incur any interest cost at all.

Therefore he incurs the interest cost for the purpose of renting out the old house. The interest is therefore allowable against the Sch A rent for income tax purposes.

What matters is the client's purpose in incurring the interest expense, (ie is it for the purpose of renting)not what the borrowed funds are spent on nor what asset the borrowings are secured on.

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By User deleted
15th Nov 2005 10:31

An interesting point raised by John
Thanks for all the answers. Despite of most replies agreeing that the interest should be allowed only if loan secured against the rented house (this is not the case here as loan taken out secured on new house -PPR), John's reply is neverthless interesting in that "what asset the borrowings are secured on". Does that mean the interest is still allowable?

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