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Tax deductibility re interest paid

What interest can be claimed?

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My client had a mortgage taken out on a property he was renting out.

He also owns a limited company and is the sole director.

He was reducing his property income by the mortgage interest.

His limited company borrowed money from a bank and he used that money to pay off the mortgage.

He's now upset that I have said he can't deduct any interest because he isn't paying any interest.

He says he should be able to deduct the interest from his property income. He's not happy with my suggestion that the company can claim tax relief on the interest paid by the company. This is because he is unsure about the profitability of the company.

I have suggested that if he wants to deduct interest payments from the property income he should provide a loan from the limited company to himself. I would think that would cause problems with the company having to pay s455 charges.

I haven't yet got to the stage of explaining that he wont be able to deduct all the interest payments because of the reduction of taxibility of mortgage interest.

What suggestions do people have about what could be done?

Replies (17)

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By Bobbo
16th Jul 2021 18:00

Am i reading this right? The way I read it is:

Your client owns a rental property personally.
They own a limited company through which they do some sort of trade.
The limited company took out a loan and used this to pay off a mortgage attached to the rental property that the individual owns personally.

You mention that if the company loaned them the money there would be S455 charges. Has the company not already let the money to a participator by way of paying off a loan they had? And thus S455 is already in point?

No idea whether there are any limitations on the deductibility of interest in the company given the use of the loan.

Has director of company defrauded by misrepresentation the bank in terms of the purpose of the loan? Surely bank did not lend company money so it could just give it to its director/shareholder.

Please clarify if any of the above is a misunderstanding of the OP.

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Replying to Bobbo:
By petersaxton
16th Jul 2021 20:39

"Has the company not already let the money to a participator by way of paying off a loan they had? And thus S455 is already in point?"
If they were the only transactions relating to the director I would agree. The client uses a lot of his own money to pay company expenses. Amazingly, the latest set of accounts shows the company owes the director money.
He has about 15 bank accounts either company or personal and most of the bank accounts are used for most of his properties or limited companies. The analysis of any bank account consists of at least two companies and three properties rented out. My client takes no notice of my suggestions to limit one company bank account to the relevant company and have one bank account for each property.
He always does the opposite of what I suggest and then complains that everything takes too long to do properly.
Once I am given accurate information the situation might change.

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Replying to petersaxton:
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By David Ex
16th Jul 2021 22:21

petersaxton wrote:

Once I am given accurate information the situation might change.

Come on! You really don’t think he’ll change, do you? If you value your time and sanity, you need to drop him ASAP. It’s way beyond naive misunderstanding. If he’s not being dishonest, then he is certainly acting very recklessly.

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By Tax Dragon
16th Jul 2021 18:06

Having committed BBL fraud, your guy wants tax relief for interest he hasn't paid?

(Caveat: of course I know nothing about the [overall] situation. I may be very wide of the mark. In what I have said and in what I'm about to say. Which is... what's to be done? SAR?)

Edit: I see I'm not alone. Thanks Bobbo.

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Replying to Tax Dragon:
RLI
By lionofludesch
16th Jul 2021 18:42

Tax Dragon wrote:

Having committed BBL fraud, your guy wants tax relief for interest he hasn't paid?

(Caveat: of course I know nothing about the [overall] situation. I may be very wide of the mark. In what I have said and in what I'm about to say. Which is... what's to be done? SAR?)

Edit: I see I'm not alone. Thanks Bobbo.

Has anyone mentioned BBLs before you, Drags?

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Replying to lionofludesch:
By petersaxton
16th Jul 2021 20:48

It's not BBLs.
The transactions went through the limited company and he told me they were all personal. Recently he told me they were company loans and the bank gave him schedules showing all the transactions.
When the mortgage was paid off he thinks he should still be able to claim for interest against the property rental income despite these loans being company loans. When I explain the tapered interest restrictions I am expecting him to say that the properties should be treated as owned by his limited companies!

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By Hugo Fair
16th Jul 2021 20:54

"He's now upset that I have said he can't deduct any interest because he isn't paying any interest" = client appears to be braindead (irrespective of relevant tax legislation).

"He always does the opposite of what I suggest and then complains that everything takes too long to do properly" = it is pointless retaining this client (unless for some weird reason you enjoy the associated pain).

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Replying to Hugo Fair:
By petersaxton
16th Jul 2021 21:09

I dont enjoy the pain he causes. He is ill and I am trying to stop him messing up his life any more. I will not go to jail by agreeing to his ridiculous ideas.

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Replying to petersaxton:
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By Tom Cross
16th Jul 2021 22:36

Peter, you’ve been a very respected member on this forum, for many years.

If you’re not very careful, your client won’t be the only one who is ill.

Come Monday, you need to make some very serious decisions about the future of this relationship, for your own well-being.

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RLI
By lionofludesch
16th Jul 2021 20:55

Is this the fella with the over active credit card?

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Replying to lionofludesch:
By petersaxton
16th Jul 2021 21:07

Yes

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Replying to petersaxton:
RLI
By lionofludesch
16th Jul 2021 21:27

Ill or not, do you want him as a client?

It's a rhetorical question. No need to post the answer.

Some fees aren't worth earning.

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By petersaxton
16th Jul 2021 21:16

He wants to speak to a "Chartered Tax Advisor". He thinks that if a "Chartered Tax Advisor" says that he can claim tax relief against interest for property income for interest paid by his limited company then he cannot be prosecuted. He doesn't realise that both himself and any "Chartered Tax Advisor" would both be prosecuted for conspiracy to defraud.

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Replying to petersaxton:
RLI
By lionofludesch
16th Jul 2021 21:29

No doubt he'll keep asking folk until he gets the answer he wants. Which may be never.

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By Tax Dragon
18th Jul 2021 06:57

Somehow

petersaxton wrote:

It's not BBLs

is one of the least reassuring sentences I've ever read. While

petersaxton wrote:

Recently he told me they were company loans and the bank gave him schedules showing all the transactions

is up there with the most worrying. (Well, obviously not really, but you get my point.) Have you seen this schedule? You say he's had it, you haven't said you have. But you have said he doesn't give you paperwork.

How long have you acted for this splint? How come the issue of interest restriction has not arisen before?

(I'm not actually asking. I'm just thinking that this thread contains quite a few... shall we call them 'sentences of concern'? And, like the others, I'm wondering what good you think you're doing.)

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Replying to Tax Dragon:
By petersaxton
18th Jul 2021 14:15

I have seen the schedules.
He has been my client for nearly 20 years.
He's wanting to put the corrections in the latest set of accounts. I think the materiality would be difficult to justify.
I assume there will be arguments about that too.
He's sent emails to about six "tax advisors". It will be interesting to see what they say.
I have been pushing him to use OCR for all the bank statements he's only just told me about. At present he is going along with me.

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By Cheshire
19th Jul 2021 15:04

You have really surprised me with the 2 questions posed on the same day Peter.

I'm trying to work out if you are having a crisis of confidence (seems very unlikely!); are just so frustrated by the client that you kind of wanted a rant(without ranting!); have just reached the end of your tether and wanted to hear what you already know in terms of letting the client go. Or something I'm missing.

Dump and run is the best for your own health. Some folk you just cannot help, no matter how much you try.

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