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Tax Relief or No Tax Relief, that is the question.

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Tax Relief or No Tax Relief, that is the question.My current home is mortgage free and I am considering buying a new home on a new mortgage taken out on that home, then renting out my current home.

My question is; will I be allowed any mortgage relief on the new mortgage even though its not on the rental property?

I am quite confused already as a Sister of one of my best friends is a “Tax Expert” in an accountancy firm and does rent out a property or two herself.

This was her response -

You should be able to claim mortgage interest relief on a loan up to the market value of the let property on the date you put it into your property letting business. This is because business relief rules allow tax relief on a loan to withdraw your capital from a business.

For example if your current property has a market value of £300,000 you can claim tax relief on a loan up to this amount.

The link below to HMRCs manual , example 2 , explains this.

The manual does not state that the security of the loan has to be the let property and therefore it should be possible to borrow the money against your new home (ie: not at buy to let rates) and get tax relief on the loan interest against your rental income.

You are able to use some very beneficial tax reliefs if you sell your current property after it has been let but that’s another subject.

http://www.hmrc.gov.uk/manuals/bimmanual/BIM45700.htm

However I was not convinced and really need to be more certain of my Tax liabilities before I can commit to buy my new home. So I asked her if she was sure as Example 2 was quite different to my situation.

This was her response.

Yes its not easy but as far as I know it doesn’t matter what the funds are secured on. What you are doing here is not claiming relief on a mortgage to buy a property you are letting, but are borrowing money so that you can withdraw your loan to the letting business. Your loan to the letting business is the market value of the property on the date you put it into the business. (market value on the date first let).

I realise this is not easy to understand but I believe it works ( ie: is within the law of tax).

The first para of the guidance below, I believe gives the OK for a claim.

Tax as ever is grey not black and white , and because we work under the rules of self assessment you have to take the decision as to what to claim up front.

You could try one of the big firms of accountants and see what they think , if you get them to do your return with the claim as above and it fails you would be covered by their insurance.

I assume you have explored getting a loan on your current home now to fund the new purchase, you would have to tell the lender due course when you are let your current home and they would then charge you a higher buy to let rate but the tax relief would be worth more. You would then be completely in line with HMRCs example 2.

That said, I would go for my original advice.

Yours

http://www.hmrc.gov.uk/manuals/saimmanual/saim10030.htm

I am still not convinced and I got lost in some of the above to be honest.

So, what do you all think?

Yes or No to Tax Relief on the new mortgage secured on the new home?

Thanks a lot in advance.

Paul

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Comments

  • Hi Paul

    The first point I would make is that you should treat any specialist tax advice on a forum as you would getting advice from a bloke in a pub. It may be right, it may be wrong but you will have no recourse if it is wrong.

    My second point is that you don’t need to go to one of the big six accountancy firms to get specialist tax advice which is backed by professional indemnity insurance. I use a boutique firm of Chartered/Certified accountant which specialise in providing property tax advice and where the owners are portfolio landlords themselves. Their advice is also insured but their fees are a fraction of those charged by the big six. If you would like an introduction please see the contact form in this thread >>> http://www.property118.com/landlord-tax/

    Now having explained that I am not a qualified tax adviser and that my understanding of how tax affairs work can not be relied upon as advice I will explain my understanding.

    Interest on a new mortgage secured on a new home which you are going to live in cannot be offset against rental income as it bears no relation to to the rental business.

    However, I think your sister is correct about raising a mortgage up to the value of your current private residence which is to be rented out, i.e. the mortgage interest on that mortgage will be allowed to be offset against rental income. What I am not so clear about in my own mind is whether the amount of mortgage you will be allowed to raise on this basis will be calculated based on the original purchase price or the value of the property when you first rent it. I suspect the latter but as explained, I’m really not certain about that.

    Now here’s a further thought for you. If the property is in your own name only you could sell it to you wife. There is no CGT on transfers between spouses and there wouldn’t be in this case anyway as it’s a sale of a principal private residence. The purpose of your wifes new mortgage will definitely be to purchase a rental property. Therefore, she could take the maximum mortgage and offset the mortgage interest against rental income. The balance of the purchase price could be left outstanding to you and when values and rents rise to allow her to remortgage she will be able to offset mortgage interest on the increased mortgage used to pay you off too.

    Another option, if the property is owned jointly, would be to sell the property to a limited company which you own. There would still be no CGT payable as you would be selling your own personal private residence, which attracts no CGT.

    Whichever of the options you choose, this should provide you with an opportunity to raise substantial cash to buy your next home.

    I appreciate that a buy to let mortgage may be priced at a higher interest rate so you will need to take a commercial decision on whether the increased interest rates and fees are more than offset by the tax relief.

    I hope this helps and please feel free to fire more questions back at me.

    Please remember though, this is not professional tax advice, just the opinion of a well meaning friend, a retired financial adviser who is no longer insured to provide financial or tax related advice :)

    Will you be supporting our mission to facilitate the sharing of best practice amongst landlords and letting agents by becoming a member of The GOOD Landlords Campaign by the way?


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  • Hi Paul

    Here is a without responsibility answer, tax relief for interest is based on the purpose of the loan which attracts the interest, in your case to buy your private home, so you borrow against your new home and secure the debt against that new home, so based on that situation there is no connection to the property you are going to rent out, so the short answer will be No tax relief for interest.

    It is always worth paying for advice in the situations as there may be a way around this…………

    Jason


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  • @Jason Holden – I agree!


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  • Andrew Diver says:

    I agree. Whilst in principle what your relative is saying will work but in practice that isn’t what you are doing. It isn’t possible just to say a debt is on one property to pay out the capital account. The debt will need to be secured there, else in reality it has no association to the rental property.


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  • Hi Mark,

    Thank you for bringing this tax question to my attention and giving me the opportunity to comment.

    Claiming the correct expenses including loan interest relief can be a minefield and this is where a good tax adviser could save you a significant amount of tax and provide you with the assurances you need. Our fees for preparing our client’s Tax Returns are modest compared to a large firm and often we are able to save our clients more in tax than the amount we charge.

    Without going into detail, Paul’s “Tax Expert” friend’s advice is correct including (in Paul’s specific case) the maximum amount of mortgage interest tax relief he is entitled to claim. Interest relief may legitimately be claimed in respect of loans funding the withdrawal of capital introduced from a rental business.

    We would be delighted to discuss the range of services we are able to offer at a very competitive rate to any readers who would be interest in obtaining specialist tax advice for their rental business. Please complete the contact form at http://www.property118.com/landlord-tax/


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  • Neil is correct, he is essentially talking about equity release, which is acceptable with HMRC, just make sure you do it right.

    Jason


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  • Sarah says:

    I have investigated this very thoroughly and taken advice on this subject which I am happy to share:

    There’s no advantage and a whole lot of paperwork in using a limited company (unless you are talking about really big commercial level investment)

    The critical issue is what the loan is used for. So it doesn’t matter on which property you secure it provided you can show what it has been used for. However if you use only part of the loan to invest in a rental property, that is all that you can claim as an expense against rent for tax purposes. You can only claim the amount that relates to the rented property, for example, if you use some of the funds for a car or a holiday you definitely cannot claim the interest on that amount against tax.

    That said, if you are living in the property with the mortgage on it, you must check that you not in contravention of the Ts and Cs of the lender. Most B2L mortgages nowadays prohibit the applicant residing in the property as it would then come under regulated lending. There is, however, nothing (taxwise) to stop you using a residential mortgage in that case and still claiming it against tax, which would be the preferred option.


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  • @Sarah – let’s assume you purchased a rental property for cash 15 years ago which cost you £100,000. It is now worth £200,000.

    You have always dreamed of buying a Porsche and spending a week at the Burj Al Arab in Dubai but you don’t have the cash.

    You could sell the property but you would have a £100,000 capital gain wouldn’t you?

    What you could do though is get a mortgage for £100,000 (i.e. the amount you paid for it) and use that money to achieve your dreams.

    PLUS – you could offset the interest on that loan against your rental income in order to reduce profits and tax.

    Reason?

    Because you are borrowing money to repay capital which you invested into your business.

    If you were to borrow £150,000 you would only be allowed to offset the interest on the first £50,000. This is because you only invested £100,000 in the first place.

    HOWEVER, there may also be a way around this if you are married :)

    Therefore, I don’t completely agree with your statement.

    Hopefully the accountants who have already posted here will back me up on this.


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  • what if refinancing for a btl purchase leaves say £100k of surplus funds to be used solely for a future BTL purchase? is the interest repayments on that £100k a legit cost claimable against tax? thanks.


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  • Sarah says:

    I don’t know why you say you don’t agree, your case is exactly what I said.


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