Buy-to-let mortgage problem

Buy-to-let mortgage problem

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Clients, a married couple, purchased a buy-to-let property in July 2002 for £75,000, intending to fund this mainly with a £50,000 mortgage. Due to a foul-up with mortgage brokers they ended up scraping up enough cash to buy the house outright. As they then had a cashflow problem they effected the mortgage they had always intended, drawing down the funds in November 2002. The property is owned as tenants-in-common, and after considerable refurbishment costing about £15K, it has been let from September 2003.

Whilst it would always have been the intention to have the mortgage on the house and they could not spare the cash long-term to purchase without obtaining a mortgage, I fear they have jeopardised obtaining tax relief on the mortgage interest as an allowable expense against the rental income? The mortgage was not used to purchase the property. Are they stuck, or in completing the Return next year is it arguable that the mortgage was essential to the venture and the interest must be deductible?

Jon Stow

Replies (4)

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By AnonymousUser
11th Dec 2003 16:17

Sch D principles apply
The clients are conducting a Sch A business the profits of which are to be computed on Sch DI principles.

The initial balance sheet of the business will have shown investment in property £90,000 balanced by owners' equity of £90,000.

The clients subsequently refinanced the business by means of a £50,000 mortgage which was effectively used to repay the same amount of owners' equity.

The balance sheet now shows £90,000 property balanced by £40,000 owners' equity and £50,000 mortgaged debt.

Refinancing is a legitimate business purpose. Therefore interest on the £50,000 mortgage is an allowable deduction in computing the Sch A profits on Sch DI principles because it is incurred wholly and exclusively for a business purpose (ie the refinancing).

The idea that interest is only allowable if the mortgage proceeds have been used to acquire the property is a hangover from pre-1995/96 days when Sch D principles did not apply to Sch A.

See also:

https://www.accountingweb.co.uk/cgi-bin/item.cgi?id=116634

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By Jon Stow
07th Dec 2003 10:37

Story so far
Thanks, Jason and Nick. I am somewhat inclined towards Jason's bearish view, hence my original posting. Nick, the URL to your thread is:

https://www.accountingweb.co.uk/cgi-bin/item.cgi?id=115123&d=101&dateformat=%o-%B

which for some reason did not come up on my initial search of this site. I do like John Sartoris's argument in that thread, but believe it supports your client's case better than it supports that of mine. Further learned comments would be appreciated.

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By AnonymousUser
06th Dec 2003 12:16

Buy-To-Let and Mortgage Interest
My understanding is that loan interest will only be allowable as a Sch A deduction if the purpose of the loan was to fund the letting of the property.

As the property was effectively purchased for cash, the subsequent mortgage will be treated I fear by the Inland Revenue as personal borrowings leaving your clients stuck.

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By nick farrow
06th Dec 2003 17:42

loan interest
see my posting of 19th July which attracted 11 responses - I still don't really know what the answer is as there were good arguments on both sides - I wish I knew how to put the link in so you could just click to go straight to the "thread"

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