You might also be interested in
Replies (31)
Please login or register to join the discussion.
I would argue that the additional loan is wholly and exclusively for the purposes of the letting business as it is effectively refinancing the capital account.
Looking at it another way, what if I received a loan from my brother (interest free) to fund the original purchase and I then remortgaged property, using the excess to pay him back? Would that be wholly and exclusively for the purposes of the rental business? I would say yes.
Readers may also be interested in this very recent First Tier Tribunal decision where the FTT appear to agree with HMRC - see paragraphs 103 et seq in the decision of TC06123: REBECCA LOUISE VOWLES [2017] UKFTT 704 (TC). Decision is here http://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j10092/TC0....
Again John, that makes no reference to the capital account. It is not in dispute that if the new mortgage goes over and above the value of property when first applied to the letting business, that the interest is not allowable.
But the taxpayer in that case shot herself in the foot by expressly stating that the purpose of the new loan, as far as she was aware, was to release funds for a non-qualifying purpose. Would the outcome have been different had she claimed that the purpose of the new loan was to provide working capital for the business? Who knows.
I've got a case like this going on right now where we need to increase the interest claimed in line with the capital account, so a highly pertinent article.
It sounds to me more like untrained HMRC staff getting it wrong than any official change of policy. Happens all the time these days. They probably don't even understand the concept of a capital account.
Trouble is, once they adopt a position, they dig their heels in and refute all arguments to the contrary. You just have to be very persistent. Will be interesting to see if they let it go to Tribunal.
There is some logic to HMRC's argument about the funding but legitimate expectation should prevail here.
If this was a company with loans from shareholders and those loans were repaid from refinancing, there would be no argument that you cannot repay more than the original shareholder loan. I know it's not he same but it ilustrates a mindset.
What happens if there is a fall in property prices leading to an overdrawn capital account? If BIM47500 applies in reverse the relief reduces. If the gov.uk guidance applies, the entire loan interest is relieved because it was only ever for property purchase.
I wonder if this is an effect of interest no longer being a business expense but a relief against profits. If it is not an allowable expense, does the relief face a tougher test?
You don't revalue the properties, so current market value is irrelevant. Its what you paid.
I have long thought that HMRC were wrong about allowing relief on such loans so this doesn't come as a surprise.
I do think that they should stand by their published guidance as it is grossly unfair to expect people to second guess published and authoritative guidance. It simply emphasises that HMRC do not know what they are doing and don't understand what they are saying.
I suppose it stems from HMG who continually fail to perceive the consequences of what they are legislating for. They just look at the next soundbite. Osborne was about the worst for that and has made the biggest mess of tax law since Income Tax was introduced.
Heaven help us!
Osborne was about the worst for that and has made the biggest mess of tax law since Income Tax was introduced.
Heaven help us!
And to think that Income Tax was likely considered a "safe pair of hands" after taxing tea had proved such a disaster for Freddy North.
I'd point the HMRC officer to their own manuals, which have more authority than the dumbed down guidance on their website.
Then ask him why he/she feels that the website should have more authority then their own manuals.
Then ask them to state clearly on which provisions they are relying on to go against basic accounting principles.
Then ask them to submit the case for internal review- I've dealt with a numbers of cases like this where the first officer is adamant no relief is due only to have them have their mind changed by someone higher up the food chain that understands basic accounting rather than HMRC dogma.
It may be that someone has released some internal guidance badly written on the subject and it's been misinterpreted by both those that write the website and the HMRC officer involved.
As one of those that contributed heavily to getting that change made all those years ago I'm very much interested in how the case goes. I no longer have the correspondence and notes we made in those discussions with HMRC otherwise I'd be sending them over!
I have taken HMRC on when they have made a similar statements to a (formally) unrepresented client.
We won by going through both HMRC's manuals and the legislation very slowly with them. It took a while for them to understand what was going on, but persistence paid off. I had to go right down to basics of balance sheets with them.
This was the let property campaign team so they ought to have known what they were doing quite frankly.
You could of course point out that HMRC manuals are not the law. You could then produce for the Officer an opening balance sheet for the property letting business, which would show capital introduced equal to the value of the property. You could then point out that fi a person wishes to borrow to finance his business rather than finance the cost himself, that does not mean that the interest he pays on the borrowing is not wholly and exclusively for the purpose of his business. If a person were required to provide the whole of the finance for his business mortgage interest could never be allowed.
I doubt this is actually a change of HMRC policy. it seems to be an individual Officer taking an idiosyncratic view. I would be surprised if that view was upheld on review.
This HMRC policy change was mentioned last month here:
https://www.accountingweb.co.uk/any-answers/mortgage-interest-from-perso...
This issue seems to stem from the time Sch A was scrapped and Sch D rules were applied to the concept of a 'property income business'.
With a 'Sch D' business, loan interest is generally allowable provided the proprietor's capital account is not overdrawn. I have successfully argued that even if it is overdrawn, the interest is allowable if we can effectively clear the O/D capital account by adding back accumulated depreciation as a non cash movement.
So why should it be any different for the 'property business'? I think the problem is that HMRC are not differentiating between the proprietor and the business. The business is using the funds to provide working capital, it is the proprietor who is using his drawings for non business expenditure. Therefore, as far as the business is concerned the interest is incurred 'wholly and exclusively'.
Would love an any answers answered or Tax Tv discussion on this - Tim and Giles if you are listening...
I am an avid follower of Rebecca Cave's articles but there are two stand-out things I would take issue with here. Firstly, the heading: "HMRC altered guidance to deny interest relief". No they didn't! BIM45700 is still there; as has been mentioned it's the dumbed-down GOV.UK guidance which is inadequate (although not actually wrong, I would argue).
Secondly, there is a paragraph headed "HMRC Backs Down" followed by these words: "HMRC are still not backing down." Say that again??
I think at the heart of the issue is the fact that the majority of trading businesses (even quite small ones) have a balance sheet and the proprietors capital account is therefore visible. However, in my experience the vast majority of rental businesses do not have a balance sheet; and even if they do, this is not captured in the Land and Property pages and so is not visible. This is a recipe for confusion and misunderstanding, even if you are dealing with a competent, well-trained HMRC Officer which, sadly, these days is a rarity.
Comments noted, Rebecca. However, I'm still not convinced that HMRC has "altered" its guidance in any meaningful way. I think the GOV.UK "Idiots guide" was merely updated to reflect the restriction to basic rate relief from April 2017. Yes, there's a reference to wholly and exclusively in there but that has ever been thus for a trading concern, which is how the rental profits have to be calculated; so, for my part, I can see nothing new there.
As I see it, it's simply a case of an ill-informed/trained Revenue officer who has made the classic mistake of taking the Idiots Guide as Gospel. And having painted him/herself into a corner doesn't have the good grace to concede. Sad to say, this happens all the time and with increasing regularity as all the properly trained Revenue staff reach retirement age. Lord help us when MTD comes in!
As as already been alluded to by several posters, unless the new loan exceeds the capital introduced to the letting business at the start then surely the loan must be wholly and exclusively for the business. Effectively it's substituting a loan from the owner (of the difference between the market value at introduction and the original mortgage) with a 3rd party loan.
The only way I could see any contention would be over the market value at introduction.
I don't really see any inconsistency between the wording of the BIM or the gov.uk page. The difference of interpretation seems to come from whether the original loan, or market value is the threshold for whether the additional loan is w&a for the business. Example 2 seems to provide clarity on that.
I wonder what would happen in the case the owner paid down the principal by £x thousands but then a couple of years later increased the loan again.
The problem stems from the fact that most HMRC staff have little or no knowledge of accountancy/bookkeeping.
I remember a wasted afternoon trying to explain to the 'VAT man' why the purchases and sales figures in the accounts did not tally with the corresponding VAT Returns.
Any news on this.
Seems it has been left up in the air and I read conflicting advice on this. Some say drawing capital still fine and others say it is not.
BIM45700 includes the example of a property re mortgaged for personal reasons and allowed, so my view is it is all fine to claim, albeit HMRC may have an issue with doing so it does not make it wrong.
Hi Everyone,
Do we have any news on this ? are we allowed to deduct interest for the loan if we draw the capital for a personal reason and if we make sure it is not over drawn when it was initially brought onto the letting business ?
Thanks,
I'm in touch with the tax advisor handling this case and he said a few weeks ago that it is still ongoing and they are awaiting a court date.
Hi,
Did you receive any update on this at all?
The poorly written (deliberate or otherwise) HMRC update has created confusion in a previously well understood area. Quelle surprise!
I'm in touch with the tax advisor handling this case and he said a few weeks ago that it is still ongoing and they are awaiting a court date.
Hello,
Do we have any update on the above case please ?
Thank you,
Viha.
Thank you for replying.
Please keep us posted about the outcome of the case.
Kind regards,
Viha.
Thank you for replying.
Please keep us posted about the outcome of the case.
Kind regards,
Viha.
I'm in touch with the tax advisor handling this case and he said a few weeks ago that it is still ongoing and they are awaiting a court date.
Hello,
Do you have any update on the above case please?
Thank you,
Viha.