Husband & wife have 2 rental properties with one being let to husband's brother @ £6,000 per annum.
Due to Covid, unemployment and mental health issues, brother could only manage to pay two months rent in 2020/21. He is expected to catch up and pay the rental arrears over a long time.
I have a strong feeling the property rent charged is let at slightly less than it could be.
The buy-to-let interest charged is usually around £2,000 per annum. During 2020/21 the BTL fixed rate mortgage came to an end and had to be remortgaged (no increase in loan) with a mortgage arrangement fee of around £2,500.
2020/21 repair costs were £3,000. At first glance and using accruals accounting, the 2020/21 tax position is:
Rents due £6,000 less repairs £3,000 = £3,000 @ 20% = £600 tax
The £4,500 finance costs would have reduced the rental tax bill by £4,500 @ 20% = £900 (maximum).
The second rental property produces decent profits.
My questions are:
1) Could HMRC seek to disallow all of the interest and remortgage costs on the basis the property let to brother was not let on commercial terms.
2) Would the disallowance be of the whole of the finance costs or merely enough to reduce that property's tax bill down to nil.
I have read in a property tax article on the subject of rentals to friends and family that mortgage interest and remortgage fees are not tax allowable if the finance fees are not incurred for business purposes, but it seems draconian that no finance cost tax allowance at all is due. That tax article extends the tax disallowance to non-commercial rents to friends and family.
3) If allowable, do I assume the excess finance tax relief reduction at 20% on the first property is ring-fenced and incapable of being offset against the profitable property or even being carried forward to set against future rents of the brother's rental.
4) What is the difference between a rent on a commercial basis and a market value rent.