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Remortgage interest allowability

Is It allowable

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Client bought a property for 100K 25 years ago, paying £40k from personal funds and mortgaging £60k.

Property value is now £200K

remortgaged for £100K paying off old mortgage and using £40k to buy a speedboat for personal use.

Can he claim IT relief on new mortgage interest on £100K (subject to new taper regime)

cant see any guidance to say not in PIM but

says : 

Increasing your mortgage

If you increase your mortgage loan on your buy-to-let property you may be able to treat interest on the additional loan as a revenue expense, as long as the additional loan is wholly and exclusively for the purposes of the letting business.

Interest on any additional borrowing above the capital value of the property when it was brought into your letting business isn’t tax deductible.

If the mortgage is for a residential property then the restrictions on interest from April 2017 will apply.


where in tax legislation does it refer to the statement "you may be able to treat interest on the additional loan as a revenue expense, as long as the additional loan is wholly and exclusively for the purposes of the letting business"


Replies (10)

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By Ruddles
08th Nov 2017 14:21

If you'd raised this question a year ago, the answer would probably have been, yes, you can claim a tax deduction (sic) for the additional interest. But not any more - that is, if you accept HMRC's revised stance.

ITTOIA 2005 s34(1)a) (applied by s272).

The above assumes that you're referring to a BTL, since this is not referred to anywhere in the question.

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Replying to Ruddles:
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By Portia Nina Levin
08th Nov 2017 14:28

Surely if the loan is provided to the business as working capital, and the proprietor then happens to withdraw his capital, which just happens to be the same amount, then even the "conditions" of the new idiot guidance are satisfied.

I'm not sure that HMRC has changed its stance. They're just using a different idiot to write their idiot guidance.

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Replying to Portia Nina Levin:
By Ruddles
08th Nov 2017 14:59

I agree. The problem is that however idiotic the guidance is, that is what we are faced with. It takes me back to the old days of a partner borrowing to introduce capital to the partnership and then immediately extracting the cash for a non-qualifying purpose (prevalent at the time that MIRAS disappeared). HMRC were quite unhappy with such arrangements and so the general advice was to extract capital first, and then introduce the borrowed cash.

I really don't know how things are going to pan out, though.

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By Mitch
08th Nov 2017 14:31

See this recent article by Rebecca Cave:

Not sure what to advise clients at the moment!!

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By ireallyshouldknowthisbut
08th Nov 2017 15:29

For once I think I know what i am talking about as I have successfully taken on HMRC on this point on more than one occasion and won. Each time it was a real battle and involved lots of highlighting and context explaining.

It IS a business purpose up to the value invested in the business.

The new "guidance" is just written in a poor dumbed down way.

No legislation has changed, and the example in the BIM manual is still there which explains the drawing out of owner's capital IS a business purpose.

Business purpose is satisfied up to the initial investment, and potentially beyond if there are losses.

Draw up a balance sheet.

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By ireallyshouldknowthisbut
08th Nov 2017 15:42

To add in my last battle with the buggers I quoted BIM45665 which has a nice example from In Scorer v Olin Energy Systems Ltd

The opening para to BIN45650 (and is repeated on each relevant page) states

“This chapter applies for Income Tax purposes to the computation of trade profits and property income. References in the text to a ‘business’ should therefore be taken to include both trades and property businesses.”

The opening parts of BIM45700 states very clearly that

“Proprietors of businesses are entitled to withdraw their capital from the business, even though substitute funding then has to be provided by interest bearing loans.”

Its all in there.

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Replying to ireallyshouldknowthisbut:
By Ruddles
08th Nov 2017 16:00

That last quote (in particular "then") suggests, though in no way confirms, that the timing of transactions may be important (see my earlier comment re introduction of partnership capital). But the example given by HMRC does indeed involve borrowing first and THEN extraction of capital, which suggests that either (a) order of events is unimportant and/or (b) HMRC don't understand their own guidance.

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Replying to Ruddles:
By ireallyshouldknowthisbut
08th Nov 2017 16:19

HMRC dont understand their own guidance.

In BIM45700 there is a bit which explains why the loan is allowable, but seems to be taken out of context and read as an exerpt and not as part of the whole chapter which means it can be misinterpreted. Once you read the whole thing top to bottom it makes sense and the penny drops HMRC side.

To be fair to them THEIR internal guidance they are working off is wrong, and says its not allowable.

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Replying to ireallyshouldknowthisbut:
By ArranP
30th Sep 2018 14:30

What is the situation regards capital repayment mortgages within Ltd Co, once the mortgage is fully repaid ?

Can a subsequent mortgage be taken out, equal to the value of the property when brought into the business ?

I imagine there would be no Corporation Tax due, but any capital withdrawn from the Ltd Co would be subject to income tax ? and interest on the mortgage can still be claimed as a revenue expense ?

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By MJShone
08th Nov 2017 16:28

I'm with ireallyshouldknowthisbut on this one. The interest is allowable.

HMRC are simply wrong in the argument that Rebecca's article covers.

My only issue is whether we now need to disclose in the White Space because HMRC may take a different view. (Even if that view is patently wrong and it may only be a little pocket of people at HMRC who take it!)

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