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Allowable Interest

Allowable Interest

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Mr & Mrs S own the house (A) they live in outright (value £275000)

Mr & Mrs S and their son own a 3 bed terrace (B) between them recently bought for £62500 now worth £85000 after refurbishment (never been let).

Mr & Mrs S intend to purchase a new house (C) to live in for £450000 with a mortgage of £337500 allowing them to add houses (A & B) to their rental portfolio.

Although the loan facilitates the purchase of the new house (C) it is "wholly and exclusivley" to allow them to add the two properties to thier rental business (as they could alternatively sell the A&B and withdraw the capital).

What actions do Mr & Mrs S need to take to ensure that the interest is an allowable expense against the rental income generated from A & B?

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By BKD
02nd Mar 2012 16:54

BIM 45700

Example 2 may be of some use to you. It would seem that in order to secure interest relief, the mortgage should be raised against the rental properties, with the funds being used to purchase the third property. I suspect that if the mortgage is secured against the new property HMRC would argue that there is no connection with the rental business. The point being that you need to be able to demonstrate introduction of capital to the rental business (in the form of the two properties) followed by extraction of capital (in the form of mortgage funds).

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By bassanclan
02nd Mar 2012 17:18

BIM 45685 says that security is irrelvant, but I take your point.

 

I think the following scenario may meet the test:

Mr & Mrs S purchase C for £450000 with £337500 mortgage

A&B are not added to the rental business

Mr & Mrs S pay down the mortgage to say £37500.

 

A&B are added to the rental business and the mortgage extended to £337500 with £300000 being used as a capital withdrawl from the rental business. So £300000 is for use in the business the remaining £337500 for "personal use"

 

 

 

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