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Mortgage interest relief in a partnership

Restrictions of mortgage interest for business and the new landlords restriction in a partnerhsip

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I currently act for a partnership that undertook a property conversion in 2012/13 which generated taxable losses of c£250k to carry forward against future rental profits from the property. Every year since, the rental profits have been covered by these losses and there are still more losses to use.

The partnership accounts currently show the partners are owed c£130k in capital investment and undrawn profits which they would like to obtain. They are looking to remortgage the property in order to raise sufficient funds to draw their partner accounts down to zero.

My first question: I believe if they were to overdraw their partner accounts, there would be a restriction on the mortgage interest tax relief as it is no longer being put to business use. Is this correct?

Further to this (and not directly connected), the property in question is a mix of commerical and residential and so is caught by the new restriction on landlords interest relief as far as I understand it. What I cannot see is how this works in practice. I assume I apportion the loan between the commercial and residential elements somehow and 25% (this year) of the interest relating to the residential property is restricted to basic rate but how do I do this? Does each partner declare the restriction on their personal tax returns if it applies to them? And if so, do they then utilise a different amount of the brought forward losses to cover the income?

As you can see I'm a little out of my depth here and am getting even more worried by how these two may interact!

Any help would be greatly appreciated.

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By Wanderer
05th Dec 2016 17:05

MarkKing wrote:

I currently act for a partnership that undertook a property conversion in 2012/13 which generated taxable losses of c£250k to carry forward against future rental profits from the property. Every year since, the rental profits have been covered by these losses and there are still more losses to use.


Back to basics first, are you sure you are happy with this statement?? Are you sure that the conversion costs were revenue expenses?
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Replying to Wanderer:
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By MarkKing
05th Dec 2016 17:19

The costs were capitalised but qualified for flat conversion relief before it was repealed on 6th April 2013.

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By Portia Nina Levin
05th Dec 2016 17:30

Good come back!

I think you have it pretty much correct. I would disallow 25% of the total interest allowable in relation to the residential properties (in the tax comp) through the partnership return, and then get each of the partners to claim their share of the tax reducer in relation to the disallowed element on their personal returns.

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Replying to Portia Nina Levin:
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By MarkKing
06th Dec 2016 14:13

Thanks for the reassurance.

How does this interact with the brought forward losses?

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By Portia Nina Levin
06th Dec 2016 15:01

Once you have deducted the interest (including the 75% relating to the allowable residential element) to arrive at a profit, you apportion the profit between the partners. [***]. Their share of the brought forward losses then get deducted from that, and the 25% gets given as a tax reducer. If it cannot be fully utilised, there are (limited) provisions to enable it to be carried forward. Do not blame me for the design flaws in the legislation though. Spot the hidden swear word.

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