Mortgage loan against holiday let

Not tax deductible

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My clients are keen to take a mortgage against their holiday home and then use the cash to improve their house. The holiday home doesn't need any work done. 

They also wants to use the interest payments to reduce their tax.  I explained that as the money was not being spent on the holiday let it would not be tax deductible. They really can't understand this principle. Is it easier to just stop arguing with them and create a liability on the balance sheet and just put both interest and capital payments towards this?

Anyone been here? What did you do?  

Replies (39)

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By Ruddles
20th Feb 2017 22:14

It would be easier to check the figures before categorically stating that no relief is due.

I think it's you that doesn't understand the principle.

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Replying to Ruddles:
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By AANM
20th Feb 2017 22:34

Thanks. Perhaps I am indeed misunderstanding.

Could you please explain it to me a bit? They want to take a loan against their holiday lets. The loan will actually be used to improve their residential home. But I can claim the interest from the loan against the income from the holiday lets?

That seems to contracting the matching income to expenditure principle in my head?

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Replying to AANM:
By Ruddles
20th Feb 2017 22:41

It's not a question of matching income with expenditure. It's a question of establishing whether there is sufficient capital in the letting business. In other words, what does/would the balance sheet look like?

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Replying to Ruddles:
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By AANM
20th Feb 2017 22:57

Ah that's a relief! I am glad we are both going towards the balance sheet. The balance sheet is healthy. They own the property outright but have made losses since they got the property 4 years ago.

Just to clarify my initial question, I am not against them taking a loan. They don't understand why the loan interest can't be used to reduce income so they can pay less tax.

I am very happy for them to take a loan which would reflected on the balance sheet and payments also posted to the balance sheet to reduce the loan. It's the interest treatment as an expense I don't agree with.

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Replying to AANM:
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By Mr_awol
21st Feb 2017 09:36

You are still somewhat missing the point.

Assuming they bought (not inherited etc) the properties and they haven't been revalued to give your 'healthy' balance sheet then seeing as you now say that they own the PHLs outright then there's a good chance that they can have tax relief on some or all of the loan

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By stephenkendrew
21st Feb 2017 07:22

What would the balance sheet look like with the loan - would the capital account be overdrawn?

If not then the interest is allowable in full.

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Replying to stephenkendrew:
By Ruddles
21st Feb 2017 08:35

It's not quite as simple as that, though, is it?

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By I'msorryIhaven'taclue
21st Feb 2017 09:08

I'll have a bash!

With a standard BTL residential property, loans can be allowable up to the market value of the property when it was first let. (Though I've yet to come across that on holiday homes).

Am I getting warm?

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Replying to I'msorryIhaven'taclue:
By Ruddles
21st Feb 2017 09:18

Hot, hot, hot!

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Replying to I'msorryIhaven'taclue:
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By Mr_awol
21st Feb 2017 09:37

Market value?

Ive always restricted it to cost plus capital improvements made......

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By I'msorryIhaven'taclue
21st Feb 2017 11:58

Mr_awol wrote:

Market value?

Ive always restricted it to cost plus capital improvements made......

I had in mind that when a pre-owned residential property is first let, the "capital introduced" (effectively the ceiling on allowable loan interest) can be its market value at that date. I guess you'd usually expect that M.V. to be a little higher than cost plus capital improvements.

Judging by the amount of finance being raised compared to the B.S. value, that might well be the case here; although I put in a caveat that I've only ever come across "M.V. when first let" with residential properties, not with holiday lets.

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By AANM
21st Feb 2017 10:09

The capital account will be overdrawn 125k overdrawn after the loan but it isn't at the moment.

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Replying to AANM:
By Ruddles
21st Feb 2017 10:13

If you're looking for clear advice, you will need to provide all relevant figures.

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Replying to AANM:
paddle steamer
By DJKL
21st Feb 2017 10:14

Maybe the bigger question for your clients is, should they even be in the FHL business given it appears they have possibly managed to lose £125k in four years with no borrowings?

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Replying to DJKL:
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By AANM
21st Feb 2017 10:45

They initially started the business with 100k that was left to the wife. They bought a property at auction for 55k did it up and now its value is 82k on the balance sheet.

They have made a total loss over for years of £8300.

They capital account is at 91,700. They want to apply for a loan of between 215k and 220k. So if they do get the loan capital account will be minus 123k to minus 125k depending on profits. Hence me saying after the loan it wont be healthy not before.

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Replying to AANM:
By Ruddles
21st Feb 2017 10:48

Very simplistically, then, I'd say that they should be entitled to relief of 82/215 of the interest charged.

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By AANM
21st Feb 2017 11:03

Thank you very much!

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By stratty
21st Feb 2017 11:26

Adding my 2p here.

I thought it was the purpose of the loan which designated whether it qualified for relief. Surely in this instance no relief is available as the finance is being used to refurbish the main residence. Perhaps I am missing something.

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By stratty
21st Feb 2017 11:29

Scratch that. It is do with the market value of the rental property when introduced to the business as a FHL.

Got it!

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By AANM
21st Feb 2017 11:56

Ah yes! Same thing I was missing :-)

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By I'msorryIhaven'taclue
21st Feb 2017 12:08

stratty wrote:

It is do with the market value of the rental property when introduced to the business as a FHL.

Which, given they are raising £215k finance against a B.S. valuation of £82k, means that M.V. when first let (or introduced into the business) might be a lot more than the £82k (which presumably represents cost plus capital improvements)

Alternatively, on a completely different tack, is there I wonder any scope for one spouse to purchase from the other in order to set a £215k M.V.?

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By marvells
21st Feb 2017 18:07

I came across this recently when dealing with a residential let. You can remortgage the property and use the funds for other things; the amount of interest that you can claim is capped at a loan being not more than the original purchase price of the property. I believe this principle is applicable to holiday lets too.

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By duncanphilpstate
22nd Feb 2017 10:32

As an owner of an FHL, may I point out that losses on FHLs can now only be set against profits from the FHL. (Possibly other property income but as I don't have any I'm not tight on that).
Therefore if they are already making losses, adding interest to the burden will not really help, will it?

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By pauljohnston
22nd Feb 2017 11:20

But Duncan there is always hope that future profits will be higher. I take your point though. When we Brexit will the rules be changed again I wonder

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paddle steamer
By DJKL
22nd Feb 2017 11:30

Not checked this but presume new regime to offset interest will also apply to FHL?

If that is the case surely there is a very limited window to accumulate losses as interest paid will become an adjustment re the tax due rather than a cost creating a c/fwd loss, or have I got the wrong end of the stick?

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Replying to DJKL:
By Ruddles
22nd Feb 2017 11:53

No - interest will continue to be deductible in computing FHL profits/losses (until HMRC change their mind)

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paddle steamer
By DJKL
22nd Feb 2017 12:39

Presume the initiative re changing interest was brought to us via one of the HMRC tax simplification focus groups.

So we now have qualifies as a FHL/does not qualify based on available days and occupancy, however we are allowed a slip out of regime with period of grace elections, then depending on whether we are in or not lets vary how interest paid will be treated and of course we also have averaging where multiple FHL properties within the FHL business.

As the years pass I have far more sympathy for Guy Fawkes.

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Replying to pauljohnston:
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By duncanphilpstate
23rd Feb 2017 16:26

Holding on and suffering losses in the hope of future profits would of course be a personal choice. However as the losses would be aggravated by a real outward cash flow of mortgage interest, and not just tax adjustments on paper, the clients would need funds from elsewhere and a stiff upper lip while waiting. I sppose they could hope for a capital gain on the property value ultimately.

I'm not sure that Brexit will directly influence the restriction on loss relief. What it might ease though is the qualifying definition of an FHL and that would be a relief itself. Someone in the Treasury had the bright idea of making the rules for FHLs consistent wherever they are located across the EEA. So an FHL in wet and windy Wales has to meet the same actual-days-rented criteria as an FHL in warm and sunny Spain, for example, where there is a good chance of winter lettings to "snowbirds". This I consider to be grossly unfair (can you guess where mine is located?) as the letting season in Wales is not much more than the school summer holidays plus spring half-term, with Easter thrown in if it's late that year. In other words, a good year's bookings just about meet the criteria. Sigh.
Moral? Never go into a business that has a quirky tax treatment, because governments are fickle.

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By [email protected]
22nd Feb 2017 12:47

Not sure what Brexit has to do with it other than they will no longer be classed as separate business to any UK lettings.
With regard to interest relief here's a good place to start but my belief has always been you can claim mortgage interest on purchase or re-mortgage up to the market value on the first day it was let. I am really surprised as to how many practitioners tell clients that it can't be claimed as the funds released were not used on the let itself.
https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-work...

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By I'msorryIhaven'taclue
22nd Feb 2017 14:29

Info-AT-amifa.com wrote:

With regard to interest relief.... my belief has always been you can claim mortgage interest on purchase or re-mortgage up to the market value on the first day it was let.

Thanks Amifa, that's what me and Stratty have been saying.

The property's B.S. valuation (presumably cost + capital improvements) is £82k, but the OP's client is raising £215k which suggests the M.V. when it was first let - ie the ceiling on allowable interest - could be a lot more than £82k.

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Replying to I'msorryIhaven'taclue:
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By [email protected]
22nd Feb 2017 14:39

I would certainly do further research in order to obtain a reliable market value for when it was first let so that the maximum relief is claimed.

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paddle steamer
By DJKL
22nd Feb 2017 15:28

So would I.

To go from what they have spent to what it now appears to be worth, only four years later (if now capable of securing £225k of borrowings against the property it must be worth well over £225k), suggests a certain skill in acquiring it at a distressed figure; they obviously ought to give up the day jobs!!

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Replying to I'msorryIhaven'taclue:
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By AANM
22nd Feb 2017 18:09

Yes I thought of that this morning.

They apparently bought the property off a friend who needed the cash urgently but couldn't find a buyer so it was sold way below the market price.

They are going to get the market value at the date they bought it but I also think they are being very optimistic with the amount they want to raise. It's possible to raise that amount against their house in london but I doubt they will get that for the holiday home. I have looked at the prices of the other properties in that neighbourhood as at today and they range between 150k and 165k.

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By I'msorryIhaven'taclue
23rd Feb 2017 11:09

AANM wrote:

They are going to get the market value at the date they bought it

I know I'm going for the Old Woman Award, but why use the market value as at the date they bought it? Did we deduce correctly that they improved or otherwise renovated the property prior to letting it? If so, why not use the market value as at the date it was first let?

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Replying to I'msorryIhaven'taclue:
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By [email protected]
23rd Feb 2017 11:17

You are quite right - it is market value on 1st day of letting - they could use comparables for that date along with cost of property plus improvements and plump for a realistic value or get RICS member to do it.

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By I'msorryIhaven'taclue
23rd Feb 2017 11:28

They're about to have it valued anyway in order to raise the loan they're applying for. Why not ask the valuer to give them a rolled-back valuation while he's at it?

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By [email protected]
22nd Feb 2017 15:50

Stupid question: it says a holiday home but I can't see reference to it being let. Maybe I've missed the post. Is it being let or is it intended to be let?

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By Ruddles
22nd Feb 2017 16:02

"I explained that as the money was not being spent on the holiday let ..."

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By I'msorryIhaven'taclue
23rd Feb 2017 10:58

Also: "I can claim the interest from the loan against the income from the holiday lets?"

or: "They own the property outright but have made losses since they got the property 4 years ago."

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