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Tax Insider Tip: Allowable Interest (1)

7th Dec 2016
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Any business owner taking out a mortgage/loan in order to finance capital to invest in a business is allowed to deduct interest paid from income received.

Renting is deemed to be a ‘business’ for income tax purposes. The ‘capital’ investment is the property itself. Any mortgage interest paid is currently deductible from rental income received but restricted to the market value of the property at the time it was first let if originally not purchased with a view to rent. After 6 April 2017 mortgage interest will be restricted to basic rate only.

Should an owner not use all of the available capital, the interest remains allowable (assuming that what is used, is used only for business purposes) because the original reason for the mortgage remains, namely to invest capital in the business in order to finance the purchase of property.

The loan does not need to be in the form of a mortgage secured on the property itself. Interest on a personal loan (even via use of a credit card) or secured on another property is deductible from the rental income received.

If cash is used to finance the purchase initially and then the property is mortgaged to replace the cash, the interest paid on the mortgage will be allowable in full against the rental income when received.

The reason for the interest payments being allowed is intention – the intention being to purchase the property via a mortgage, the cash being used merely in place of a bridging loan.

This is a sample tip taken from our 165 page guide:

101 Tax Tips For Landlords 2016/17

101 Tax Tips For Landlords

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