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Loan interest - mixed residential and commercial

Restructure of mortgages to reduce the loan interest restriction on residential properties

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I would be interested in members thoughts on the restirction of loan interest on a mixed letting 'business'.

We have a situation whereby an individual owns some residential properties, all with o/s loans on them, and some commercial properties with no loans.

 A suggestion has been made to re mortgage so that the loans are secured on the commercial properties, and pay off the residential loans, I doubt they can all be cleared but a majority can.

My view is this does not work and the restriction still applies, per PIM2056 https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2056 we must consider the 'purpose' of the borrowing, which is to settle the residential loans - so the restriction still applies.

One could maybe argue that the loans are providing 'working capital' for the rental 'business' and so the new loans should be apportioned across the business, which does secure some extra relief.

I do not feel that a view can be taken that as the loans would then be on the commercial properties so there is no restriction to the loan relief.  The purpose of the borrowing is to pay off the residential loans.

If further properties are purchased I believe I have the same problem, the individual can borrow on the commercial properties but if the loan is to purchase a residental property then the restriction applies.

Any thoughts or suggestions?  Incorportaion relief may apply, but SDLT would make incorporating expensive.

Thanks.

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By carnmores
03rd Dec 2018 12:37

we recently had an enquiry on just this point. the way we got round it which may or may not be a help was to state the original cost of the commercial buildings plus all capitalised expenditure this exceeded the loan. we held that the fact that the commercial residences were used as collateral was incidental and bank belt and braces; if you are making a loss the working capital argument is apposite

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By Mister E
03rd Dec 2018 16:12

The commercial properties have been held for years, the loans taken out for residential as each was purchased.

Does that cause an issue?
Or is the point that arguably the loans are from working capital on the commercial properties.
Trying to get my head round it all....
Thank you.

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