Any Answers Answered: Mortgage interest relief

The issue of tax relief on a second residence sparked a lively discussion on Any Answers after AccountingWEB member Cariad71 put forward a complicated scenario.

Tax expert Tim Good highlighted the example at a Tolley CPD lecture in Bristol this week, concluding that in this situation we must consider whether interest is incurred wholly and exclusively for the purpose of the letting business.

Following a look at the Green v HMRC case, where the FTT found there was no tax relief on bank overdraft interest, Good referred to the AA post and backed John Perry and George Attazder who contradicted the prevailing AccountingWEB members’ view on mortgage interest relief.

The question

Continued...

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Comments

Known for years, but worth repeating!

Ian McTernan CTA | | Permalink

Tim Good pointed to the common error repeated throughout the postings that tax relief for the interest depends on the purpose for which the loan was taken out.

Have had that argument with accountants and indeed the Revenue for years, pointing out the same as Tim has stated above.  Property tax CTA's would be well aware of this as well as readers of taxationweb or indeed Propertytaxportal, where this very issue reared it's ugly head and the Revenue were soundly beaten down several years ago when several of us pooled our knowledge.

The more common example we come across is where property A is rented out, value at date of first let 200k, mortgage say 100k.  Several years later remortgages property to 200k,uses some of the money as a deposit on another rental property and blows 50k on a round the world trip/new car/whatever. All of the interest is allowable against the rent- don't let the Revenue try and tell you otherwise, and make sure you keep the BIM references handy to quote at them:-)

And a wave to Tim, whose training courses I went to years ago and helped me continue to look outside the box.

You might have mentioned that

v k ratliff | | Permalink

You might have mentioned that, in his comment in the original thread, vk ratliff also made the point that it is "the purpose for which the interest expense is incurred that matters and this does not always necessarily coincide with the purpose for which the loan funds were used".

 

Tom 7000's picture

so the answer is....

Tom 7000 | | Permalink

Income £600

expense £600

taxable £0

 

This is what the clients want to know not whats behind it...maybe I am just beingtoo  simple again...

Ermintrude's picture

Mortgage on new house rather than selling current house

Ermintrude | | Permalink

My current house is mortgage free.  I cannot afford to sell it (nearby development in progress has affected value), but need the capital to buy a half share in a new house with my partner.

We are getting a joint mortgage to buy the new house, raising the mortgage ON the new house.

My partner and I already have 2 buy-to-lets with their own (buy-to-let) mortgages.  Neither make any money, in fact lose money (it is the longer term investment we hope will result in a break-even position) - in common with many private landlords, I suspect, of properties let to "social" tenants with the capping of housing benefit.  However my point here is this is another property in our buy-to-let portfolio (pfft!  sounds way too grand for the reality).  But it is still a business, albeit one that makes no/loses money.  Therefore my current house is more of the same - although in my sole name rather than joint names.

I am going to let my current house. Having read this post and answers, I am wondering if I could offset some of my share of the mortgage interest on the new house against the income from my current house, rather than have to raise an expensive buy-to-let mortgage on it (and assuming I could get a mortgage on it) to release capital.

 

 

 

 

 

 

Mortgage Interest on let Property

Andrew1946 | | Permalink

 I have a small outstanding repayable mortgage on a property which was my main only residence, I now let this property (having moved in with partner) Reading the points relating to the  purpose of the  initial loan, I assume the now miniscule interest payments will be considered allowable as a chargeable expense against the residerntial letting businsess. Further  if I were to obtain a Buy to Let mortgage against this property on the recognised  lending criteria of 125% -130% rental, and if the release of funding which this would create, were to be used toward the funding of a another property(daughter's  or my main residence) would the then ensuing interest  be capable of being a chargeable expense against the income of the let property.

Steve-EBL's picture

BIM45700

Steve-EBL | | Permalink

 

Can anyone turn the light on for me for what I assume is a fundamental principle i am missing, why looking at examples 1 & 3 in BIM45700 can capital be introduced to start a business using a market value, but a revaluation in an existing business is not for tax purposes deemed to be a true element of owners capital?

Paul Scholes's picture

Steve-EBL    2 thanks

Paul Scholes | | Permalink

As in company law, where unrealised revaluation gains are merely paper numbers and so can't be distributed to shareholders as dividends, a random valuation on day 5 or 505 of a business asset doesn't alter the historic capital injection on day one.

Think of it like this I decide to start my B2L business today and have £200K of cash to spend so I pay this into my new business bank account and immediately spend it all on the property.  The fact that property goes up (or down) in value tomorrow doesn't effect the fact I injected £200K into my business and can draw it back in the future, borrowing from the bank, if necessary to do so.

Hope that helps

I think I have drunk too much coffee but

pauljohnston | | Permalink

I agree with TIm and wholly and exclusively but there is no business at the point the proster starts his article.Please can someone help me out of this hole.

George Attazder's picture

I'm confused too!

George Attazder | | Permalink

Firstly, what relevance has Green v HMRC got to the issue? Green essentially revolves around the inability to make a claim under what is now S.383 ITA 2007 for overdraft interest.

Secondly, this section:

Tim Good wrote:

the common error repeated throughout the postings that tax relief for the interest depends on the purpose for which the loan was taken out.

This has not been the case for several years, instead we must consider whether the interest is incurred wholly and exclusively for the purpose of the letting business

Now everybody knows that I'm a master of semantics, but Mr Good's got me whipped, hands down, here.

Whilst not being in anyway in disagreement with Mr Good, I happen to agree with all those misguided posters that focused on the purpose for which the loan was taken out.

Unless the loan itself is taken out (wholly and exclusively) for the purposes of the (letting) business, the interest upon it cannot be said to have been incurred wholly and exclusively for the purposes of that business.

The more relevant case in this matters, is in my opinion, the case of the confounded arse.

Please pass my sincere respects to Mr Good. :)

Paul Scholes's picture

My take

Paul Scholes | | Permalink

George, I agree that on the face of it Mr G's two paragraphs seem to negate each other but my understanding has always been "ignore the reason for the original loan, what is it actually been used for today" in that way you determine whether the interest being paid today is W&E OK.  I think the general statements and examples in BIM45690 set this out quite well.

George Attazder's picture

Oh, I see...

George Attazder | | Permalink

...so, I have a £500K mortgage which was used to buy my house. Since I bought that house though, my unincorporated business has made profits of well over £500K that I could have legitimately withdrawn to repay my mortgage. Instead, I chose to reinvest those profits to grow my business.

So I should have been claiming tax relief against my business profits for the interest on the mortgage to the extent that I've reinvested profits that I could have withdrawn to pay the mortgage?

Nice! Must tell my accountant!

Doesn't BIM45690 just examine a different semantic between the purpose of the loan and what was done with the money raised?

I always try to examine things from the perspective of a tribunal chairman. That's ultimately the most important perspective to satisfy. If I were a tribunal chairman (which I'm not), I'd examine the facts:

  • I'd look at what was actually done with the money.
  • I'd conclude that what was actually done with the money was also the purpose of the loan.
  • I'd consider the interest on the loan to be wholly and exclusively for the purposes of the business, to the extent that the the loan (and therefore the manner in which it was expended) was raised wholly and exclusively for the purposes of the business.

I see three things the same. It's possible that I'm just a simple man though, who likes simple things.

Paul Scholes's picture

Debits & Credits

Paul Scholes | | Permalink

George - nobody said it would be easy, your business accounts show no debit for asset introduced or credit for loan or capital intoduced so, as logical as your example is and regardless of missed or taken opportunity costs/profits, no debits and no credits mean no tax.

Like listening to jokes BIM45690 is all down to the way you read it.

Given you can afford to pay a £500K mortgage you can afford a better accountant than me.

taxhound's picture

As I understood it there are two situations....

taxhound | | Permalink

1.  If you have a mortgage on a let property, that loan can be increased to the value of the property when first let and you can spend the money on a round the world cruise - the interest will be allowable.

2. If you raise a loan secured, say against your own home, to buy a property which will be let out - or to pay off a BTL mortgage, interest will be allowable.

 

But where I struggle is where you already own a BTL property.  If you then take a loan out NOT secured on the BTL property and use it to finance a round the world trip - or indeed your own home, then this money has not gone into the BTL business so should not be allowable?  Would you not need some sort of audit trail for a loan not secured on the BTL property to show that it did go into the BTL business if you want to claim it?

Paul Scholes's picture

Nail on head

Paul Scholes | | Permalink

Tax hound - you've highlighted an issue that's been raised on here several times and one that I'm sure has been the subject of some arguments with HMRC.

Firstly it makes no difference whether a loan or any finance is secured or not, ie you can take out an unsecured loan, I suppose, at its simplest I would look at not only what the money was spent on but, if there was any doubt, the prime purpose for the loan.

So, some have argued that, in your example, you take out the loan and pay the funds into the business account (dr bank cr loan account) then you withdraw the funds as drawings and, as long as your capital account in the business is OK why shouldn't the interest be allowed?

My analogy to this in a traders accounts is where a self employed person is struggling to make ends meet in the business and suddenly regrets having paid cash for his van a few months back and so gets a business bank loan of £20K, £10K of which he immediately draws as personal drawings to get his personal finances back in the black because there's been insufficient cash in the business to make full drawings.

Very similar circumstances and I'd argue tooth and nail with HMRC that that was a business loan but in your case, the intention all along was to have the money for personal purposes and putting it through the business books just a device to imply business purpose.

A different version of events however may be one in which a person with a property business takes out a £50K loan to provide a cash balance for a deposit s/he will need when attending property auctions, ie working capital.  Two months down the line after some heavy expenditure and drawings, the bank balance is only £40K.  Again I'd be happy to argue that this loan is all business.

So, as with so much I think it's a case of standing back and taking an objective view on what actually took place at the time the cash was spent (or kept).

Ermintrude's picture

Purpose of Letting

Ermintrude | | Permalink

Looking backwards at my case from the purpose of my let - it isn't to make money. 

(I'd love to sell the let house - not a Buy-To-Let, but my home I can't sell.  Then I could have a smaller mortgage on the new house and pay less interest).

Rather it is to mitigate my personal loss - I cannot sell my house.  If I let it, the rental income only goes part way toward the outgoings including my new personal cost of capital.

If it were to be compared to a trade, then it would have none of the Badges of Trade.

Which makes me wonder what the scenario might be if rather than a residential let, I let it as a Furnished Holiday Let - could I then make use of the losses (including my personal cost of capital) against my other income?

What if the letting activity was a limited company - paying rent to me personally - against which I offset my cost of capital?  Although that feels like a pointless layer.

androo235

androo235 | | Permalink

The Neo-Classical Economic (NCE) misconception of property and particularly land has been the root cause of the latest property bubble and all the previous ones. The money creation and low interest rates now necessary to keep the economy afloat are contributors to the low returns from (non-land) investments generally. Meanwhile large numbers of middle class and better off workers have now become petty landlords who believe that only property (land) can reliably provide them with a pension. So, having become landlords their rentier interests are now allied to the landed plutocrats, the Russian, Arab and other foreign recruits to that class, and the bankers (even if they don't realise the latter) and against labour and capital (see http://www.economist.com/node/21556251 - behind a paywall I'm afraid, Economist June 2nd, "Jeeves and Woosterovich").

These new petty plutocrats, like the older and bigger ones, are more concerned that their land assets retain their value than they are about a prosperous economy in general. We have a religion that says land cannot be taxed and so work (labour) and capital must bear the burden. Hence, the only way out of the slump is to pay down the debts and succour the banks until the ratios look acceptable again and off we go on a new property boom cycle.  Thus the giant banks aren't allowed to fail and property (land) prices are prevented from falling to market clearing prices. Meanwhile the real economy is repressed with the imposition of austerity wherein the general public pays down the debt via the taxation of incomes and the profits of capital and the simultaneous reduction of public services (spending). 

Still, many a landlord will survive the slump taking advantage of low interest rates and tax funded rents (housing benefit) and maybe a little equity (accumulated increase in land value) withdrawal.

Under a landvaluetax system this whole discussion would be void. Provided a wannabe petty plutocrat pays the LVT on their properties there is no issue about whether or not the interest on a loan taken out is deductible or not, under LVT it isn't, nothing is. Of course that also means there will be far less tax accountants and less work at Tolley's too (or whoever it is that publishes that tome). What will Mr Good do? I'm sure he's an able man and will find something. Of course LVT would knock the (land) speculation out of the property market so there will be less plutocrats (wannabe, old money [land] or foreign) anyway, instead we'll get more savers and investment in the real economy.

Henry George - Poverty and Progress. Mason Gaffney - The Corruption of Economics - http://homepage.ntlworld.com/janusg/coe/!index.htm

On the related subject of monetary and banking reform I like Steve Keen and his "other jubillee" and the positivemoney.org website

 

 

 

Paul Scholes's picture

Lucky it's lunchtime

Paul Scholes | | Permalink

Androo235 - Over my sandwich and with a few games of Djokovic & Federer on one screen I had the luxury of being able to read your posting through 3 times on the other and think I get some of it, and think you raise some good points over the West's stupidity. 

I'm not sure though that Ermintrude will like to be called a plutocrat (even if only petty) but congrats on getting the word in so many times, from what I can tell it's a first for Accountingweb, so perhaps you were on a bet?

Anyway, do you have any thoughts on the topic of the thread?

 

Ermintrude's picture

PLUTOCRAT ? ! MOI ? ! @andoo235

Ermintrude | | Permalink

pffft - I wish!

I bet you live in a grander house/drive a posher car/wear better clothes - heck, are probably even better educated than I (I had to scuttle off and look up the meaning of "Plutocrat"!).  If so, are you more "plutocratty" than I?  Does this change if it's funded by mortgage/HP/credit card?

An' yet another thing - none of my clients who are landlords make any money - same as I, they can't get shot of their previous homes yet have had to relocate.

An' I'm not "middle class" either, come to that - by anyone's definition - androo235 you cheeky bugger  (erm, not there's anything wrong with being middle class - but I'd be pretty much stigmatised by my friends, family and clients if I were to hold myself out to be!  Rough as a badger's arse, me).

 

 

petty plutocrats

androo235 | | Permalink

Well I agree it can be tough achieving critical mass as a petty plutocrat particularly for those who only got on the merrygoround as it was slowing down or who only barely got some chips in the game in the first place. Of course some just drank too much Bollinger in the whirl of the bubble. Any of these may be in trouble.

But most will weather the storm (or should that be the doldrums) in the manner I suggest, or similar, and barring idiot offspring that lose it all  (social mobility stats seem to indicate that you would have to be spectacularly stupid to start off wealthy and blow it these days) will have launched themselves and their descendants into petty plutocracy for posterity.

It's completely understandable for individuals to wish to be rentiers, it's clearly much better to collect rent than it is to work and pay rent. I just don't think it's good idea to base the economy on encouraging this ambition and, I think we can see that we (and the world as a whole, particularly since 1989) have done just that and are getting ready to do it again.

Paul Scholes's picture

Breath out

Paul Scholes | | Permalink

And, again, your thoughts on the topic of the thread are....?

Balance sheet

nick farrow | | Permalink

whenever I revisit this old argument i always come to the same conclusion - the deductibility of the interest makes far more sense if the property investment business draws up a proper balance sheet showing the property at cost/valuation when first introduced with a corresponding credit on the owners capital account - if cash is borrowed and flows back out to repay the owner then the borrowings replace the capital account on the balance sheet

Tom 7000's picture

my take

Tom 7000 | | Permalink

You have to have a balance sheet for the client, who is not a ltd co. You look at the net. business worth, say 500k (although at this level they are usually ltd). If the main residence has a 500k loan on it you look at the clients position in the round.ie he could pay his mortgage off...if he wanted ...but holds these assets for cashflow purposes. Therefore the home mortgage is tax deductable, The key is remembering if your business net worth is 500k and the loan 700k you only get 5/7 of the interest.

bounded rationality

androo235 | | Permalink

@Paul Scholes

I thought thinking from novel perspectives was supposed to be valued in business.

I'm somewhat surprised that you cannot see the connection between my comments and this topic. I'm in favour of a landvaluetax. That is I think the argument (this topic) is bogus when put into a wider context. That's my view. Didn't you get that?

So, you're right I don't have a view to offer regarding the detailed pros and cons of this arcane topic - if my living depended in some way upon a view of this I suppose I would have to have one - but it doesn't so I don't.  Still, I don't see why I can't widen the context of the topic and point out its connections with broader concerns.

Paul Scholes's picture

Ah, now I see

Paul Scholes | | Permalink

Thanks Androo, I agree it would be nice not to have to have this debate in the first place but, I suppose that's the problem with reality, it always gets in the way of what we wish for. 

To take that to another extreme, I'm about as bored as I can be with having to deal with tax but I'm working on it, so hopefully, in a couple of years, I can read a similar article and not comment, or maybe use Time out if I'm in the mood to proselytise?

OK, but...

androo235 | | Permalink

If a story here catches my attention and I want to comment on it directly then I will and I don't see why I shouldn't. I don't post on everything that bothers me - life's too short, or post on anything willy-nilly. For example I think this story, http://www.accountingweb.co.uk/article/higher-rate-taxpayer-amnesty-unfair/529284,  has the potential for a post for me but today I just can't be bothered.

I didn't know about the "time out" forum and now I do I'll probably continue to ignore it - though I'll take a look. I do post in other places, the BBC, the Economist, the Guardian and elsewhere but as an Accountant (well, just) this seems an appropriate forum for me too.

Dang it....

androo235 | | Permalink

I went and read that story and darn it if I couldn't stop myself posting.

Ermintrude's picture

Oh God!

Ermintrude | | Permalink

Androo235 please shut up and go away.  Darn it if I can't help myself waste time and click and read what you've posted - and its not helpful.  I have to work - hard - to live - I'm not a Bolly-swilling coke-snorting jacuzzi-bathing landlord, lolling about lighting enormous spliffs with rolled up bundles of rent monies like you seem to think.

Anyhow - don't you have a job you should be getting on with?  Public sector by any chance?

I'm using up no-ones time other than my own

androo235 | | Permalink

or yours if you read my posts. You don't have to. Moreover I don't recall accusing you personally of doing or being anything, I even said that I understood, and I do understand, why people are driven to want to be, as I put it, "petty plutocrats". I chose the phrase deliberately, I accept that it is provocative, on the basis that the "petty plutocrats", and that's a lot of people, now form a nice reactionary barrier between any deep reform and the interests of the real plutocrats, large landowners (British old money and now any other sort that we welcome here, Russians and Arabs for example - see my earlier post) and their pals the bankers.

Sorry if my relative literacy offends you, though I shouldn't really apologise as  I grew up in a council house and went to a secondary modern (now there's a hostage to fortune for pedants to attack me now). I've admitted elsewhere that I have my petty plutocratic tendencies too - but the point is that  I acknowledge them.

BKD's picture

Purpose

BKD | | Permalink

Tim Good pointed to the common error repeated throughout the postings that tax relief for the interest depends on the purpose for which the loan was taken out. 

“This has not been the case for several years," he said. "Instead we must consider whether the interest is incurred wholly and exclusively for the purpose of the letting business.

 

There is a contradiction there - Tim appears to say that the purpose is of no relevance, but then says that interest must be incurred for the purpose of the letting business.

Paul Scholes's picture

It's a question of timing

Paul Scholes | | Permalink

BKD see my "My Take" posting above.

I may have bought a car for personal use 5 years ago that I now use for business.  Although far more restricted than that example, it is possible that a loan taken out years ago for one purpose may now be used for another.  In other words what assets are being supported by that loan today rather than when it was taken out.