Can I claim tax relief on remortgage interest?

by Readers Question

11:03 AM, 16th December 2013
About 6 years ago

Can I claim tax relief on remortgage interest?

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Can I claim tax relief on remortgage interest?

I’m looking for some clarity on taking equity out of a BTL Property, and whether the interest on the loans is tax deductible.

If I have a property with little or no mortgage and I’m in the process of re-mortgage it,  taking say £50,000.  Can I use this cash to buy a fast car and some holidays, wine, women and song, etc, and is it subsequently tax deductable from the rental income?

What if I’d put £50k cash into the property previously and this was just ‘paying me back’ ?

Or do I need to use any cash drawn from the property for further BTL investment for it to be tax deductible? Can I claim tax relief on equity release remortgage interest?

Question two – if I used the remortgage proceeds to buy another BTL property, is the interest deductible from the original BTL income, or the next one, or just all thrown it into one big pot of incomes and deductibles ?

If the £50k is only deductible when used for another BTL, then when would it come into play, since I’ve been advised any renovations/decoration of a ‘new’ (to me) property is only deductible against rent after it has already been let, and not to do it up ready for letting for the first time ?

Many thanks

Jeremy



Comments

Mark Alexander

11:05 AM, 16th December 2013
About 6 years ago

Hi Jeremy

The answer is that all the money is lumped together.

You can borrow up to the amount you paid for your properties (or have invested into them as capital improvements) for any purpose (including wine, women and song if you so wish) and still offset the mortgage interest against the rental income.

However, if you borrow more than you have invested into your property portfolio then you must apportion the amount of interest you pay accordingly. For example, let’s say you purchase a property several years ago for say £90,000 and have since spent an extra £10,000 which sits on your balance sheet as capital improvements, this giving you £100,000 of capital invested. Now let’s assume the property is worth £200,000 and you remortgage for £150,000.

You can spend the whole amount on wine, women and song if you wish but you can only offset interest on £100,000 against your rental income (i.e. two thirds in this example). However, if you spend £100,000 on wine, women and song and the other £50,000 on a deposit for another property then you can offset all of the interest against your rental income. If you keep the £50,000 in cash in your business then you could also offset the mortgage interest on that money against your rental income on the basis that you “intend” for the money to be used for your property business. However, if you subsequently decide to withdraw the money and spend it on something other than your property business then you must stop offsetting that proportion of the mortgage interest against your rental income.

There is, however, a clever way to borrow more than the original purchase prce and still be able to offset the interest as an expense. To achieve this you would sell the property to a spouse for the full market value. It has to be a spouse as opposed to a friend, company or family member otherwise you will have to pay capital gains tax. There is no CGT of transfers between spouses. On the basis that any new loan taken by your spouse would be for the purpose of purchasing a property then it would be perfectly acceptable to claim tax relief on all of the mortgage interest. The sale proceeds of the property would of course be tax free. Please note this isn’t a way to get around CGT though as the original base cost of the property does not change when ownership is transferred between spouses.
I trust that answers your question.

Please note this response must not be deemed to constitute professional advice. Also see >>> http://www.property118.com/landlord-tax/
.

Adrian Matthews

11:41 AM, 16th December 2013
About 6 years ago

Hi Mark,

Along similar lines. Can I offset my initial mortgage to purchase my home? I've re-mortgaged since my initial purchase to raise more capital, and invested that into more property which I have offset, but I still haven't offset my original mortgage.

Many thanks,

Adrian

Mark Alexander

12:38 PM, 16th December 2013
About 6 years ago

Reply to the comment left by "Adrian Matthews" at "16/12/2013 - 11:41":

Hi Adrian

In theory at least, if you can prove that you borrowed money to invest into buy to let property then you can offset the interest paid on the loan against your rental income. It's the PROOF which catches a lot of people out. It really doesn't matter where you borrow the money from though, it could be credit card, personal mortgage or even Wonga.com and so long as you can prove that the money was used for your rental business then it's a perfectly legitimate business expense.
.

Jeremy Smith

12:32 PM, 17th December 2013
About 6 years ago

Thanks Mark,
I'm sure alot of people can either be caught out by this, or just not sure, for instance:

I've just bought a small terraced house up north, sort of bolt hole to renovate in the summer.
I've drawn down 30k to buy this (22k to buy it, and 8k in the wings for renovation) from my existing mortgage account, so now incurring interest.
It will be empty for the next three months, then 2 months to renovate (me living there) then will get rented out through an agent.
How much of this, and when, is tax deductable ? Since I am told renovation costs are not deductable from rent.

( 8k will fit the kitchen and bathroom (none there at present), do some repairs required and decorate the house )

Mark Alexander

13:13 PM, 17th December 2013
About 6 years ago

Reply to the comment left by "Jeremy Smith" at "17/12/2013 - 12:32":

Hi Jeremy

In my opinion, all of the interest on the extra borrowings should be off-settable against rental income when you eventually get some, providing of course you keep a good paper trail of where the money came from and what it was used for.

Presumably you will not be claiming that the property is your principal private residence when you are living there for two months to do the work?
.

Jerry Sutcliffe

13:38 PM, 12th January 2017
About 3 years ago

Hi. Years ago I remortgaged my buy to let property to pay off a partner in the house we lived in. I can claim tax relief up to the the purchase price of the buy to let property? When I asked the tax helpline one advisor said yes and the other said no because it was not been used for the buy to let property. Which is right?

Regards

Jerry


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