Client started renting out a property in London in May 2015. The loan on the property at that time was 400,000 and annual interest payable was 12,000 pa and the value of the property was 1,400,000.
He remortgaged the London property in December 2016 with a new mortgage of 900,000 and annual interest payments of 18,000 pa. The extra money raised went into purchase and renovation of a new house that he lives in full time.
Under the previous HMRC guidance my understanding was that this would not have caused a problem and the extra interest would have been allowable. However I believe HMRC have now removed their guidance and their example that seemed to allow this and that now they will only allow interest relief on a portion of the new loan ( I presume 400,00/900,000 x 18,000). I also hear that HMRC's position is being challenged or under judicial review.
Have I got this right and what should we do in terms of advice and also what to put on the 2017 return. Should we play by the old rules and explain to the client the risk or play by the new rules?
Replies (4)
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Its never been the case you can deduct interest JUST so long as the mortgage is secured on the let property.
You still do the same thing. Draw up a flippin balance sheet. The legislation hasn't changed.
I would play by the old rules, the legislation hasn't changed. Obviously warn the client and you would be well advised to state your position on the white space.
The problem seems to stem from the abolition of the old Schedule A and its replacement by the concept of a 'lettings business'. This type of restructure wouldn't have worked under Schedule A. However, if it becomes a 'business' then you have the possibility of a proprietor's capital account representing the value of the property introduced. If the business chooses to replace the funding provided by the proprietor with extra bank borrowing, that borrowing is for the purpose of the business.
HMRC's thought process shortcuts this with the idea that the borrowing was to buy the speed boat or whatever, rather than repay the proprietor, who uses the funds to do whatever he likes. If everyone continues doing it the old way a test case will surely emerge.
See examples 2 and 3 BIM 45700
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim45700