Osbourne’s private landlords mortgage interest trap, but?

Osbourne’s private landlords mortgage interest trap, but?

14:31 PM, 17th January 2022, About 4 months ago 8

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Osbourne’s private landlords mortgage interest trap, but what if there is a way of changing this by releasing equity to purchase holiday or commercial property?

I have three private buy to let properties, that push me into the 40% tax band every year. I figured what if I remortgaged those properties at a very cheap rate, right now I can get a 1.99% fixed rate for five years, I have plenty of equity in them and could raise a considerable sum, enough to buy a Holiday let or commercial building outright.

My question is, can I claim the interest charged on the buy to lets against the holiday let?

All I am doing is borrowing on my buy to lets, putting that into savings and then buying my Holiday let/commercial building. As we all know, you can claim the interest back on Holiday lets and commercial buildings.

If this is acceptable, it could help plenty of us private landlords across the country.

RJ



Comments

by Mark Alexander

14:43 PM, 17th January 2022, About 4 months ago

If the purpose of loan was made very clear I cannot see a problem with this.

A similar example would be borrowing against your own home to invest into BTL. You can still claim the 20% tax credit on that borrowing.

The key is transparency and making sure your accountant records it properly for you on your tax returns, because they will have to deal with any questions raised by HMRC in the event of a compliance check.

by Smiffy

16:53 PM, 17th January 2022, About 4 months ago

I agree with Mark, you own the rental properties, if you choose to use them as security for finance for another project, there is no reason why not. The borrowed finance is for the new project, not the rentals.

I've been thinking of doing something similar but for a completely non-property related, engineering project.

by Mark Alexander

16:59 PM, 17th January 2022, About 4 months ago

My only added proviso is to be certain the Furnished Holiday Let conditions are met for tax purposes, e.g available to let for a minimum of 210 days a year and actually let for a minimum of 105 days to include only let’s for 31 days or less.

by NewYorkie

17:11 PM, 17th January 2022, About 4 months ago

Reply to the comment left by Smiffy at 17/01/2022 - 16:53
The challenges of S.24! I raised a large BTL mortgage (£750k) on my home with the purpose of letting it. Then the implications of S.24 dawned, and I couldn't afford to let it out. I considered using the cash to buy additional property but that didn't work out. I left it untenanted for 2 years until I could sell up.

I don't see how this would work, but I'm not a mortgage specialist.

Surely, the existing BTL properties are what's being mortgaged, and the interest charged is on them. This is what you will put in your self-assessment. It strikes me all you are doing is increasing the amount of interest paid and making your S.24 position worse.

You may use the proceeds of the remortgages to buy a holiday let, but there will be no mortgage on that property. But, I wonder if it would be acceptable to then remortgage the holiday let and reduce your increased BTL mortgages, and then you could claim the interest against tax?

by Mark Alexander

18:07 PM, 17th January 2022, About 4 months ago

Reply to the comment left by NewYorkie at 17/01/2022 - 17:11
I think you have misunderstood S24. Paying more interest does not increase your tax bill, it just doesn't reduce your tax bill as much as it would have done prior to Section 24.

Also, please see the two comments above, because I think you have a misunderstanding there.

I suspect you also shot yourself in the foot by leaving your former home unlet for two years and that some proper tax advice would have saved you many times over what the lack of it has ended up costing you.

by Laura Delow

12:01 PM, 18th January 2022, About 4 months ago

My understanding is if you raise funds on your own home to buy a holiday let, you wouldn’t be able to deduct the mortgage interest when calculating your profits from the holiday let. Therefore I assume you also wouldn't be able deduct the mortgage interest if funds were raised on a buy to let. As Mark says, you'd just get the 20% tax credit.
The other point is, are you wanting to raise the funds to buy a holiday let just to get round S24? If so this is a very expensive exercise as you'll pay SDLT + the 3% levy & incur legal costs & disbursements, lenders' product arrangement fee / val fee if not fees free etc, all of which might negate the tax saving for a few years even if you could deduct fully the mortgage interest as a business expense.

by Mark Alexander

12:12 PM, 18th January 2022, About 4 months ago

Reply to the comment left by Laura Delow at 18/01/2022 - 12:01
You said ...

"My understanding is if you raise funds on your own home to buy a holiday let, you wouldn’t be able to deduct the mortgage interest when calculating your profits from the holiday let."

Your understanding is incorrect.

If the purpose of the loan is for investment into a business then the loan interest can be offset against that business. The ONLY exception to this rule is BUL, in which case you only get a 20% tax credit for the interest. It doesn't matter whether what the loan is secured against, it could even be an unsecured loan.

by NewYorkie

12:51 PM, 18th January 2022, About 4 months ago

Reply to the comment left by Mark Alexander at 17/01/2022 - 18:07
Thanks, Mark. The loan interest point is good to know. I would suggest most don't.

I don't believe I've misunderstood S.24. BTL had worked for me previously only because I could offset my entire IO mortgage interest at my full nominal rate, which helped considerably because my employment income was variable.

The thought of then paying tax at 40% on a £30,000 annual rental income, plus paying £2,500 per month mortgage interest with a tax credit at only 20%, then getting clobbered with CGT when I sold, just didn't stack up for me at the time. Instead, I invested the money in other financial assets, could use my London house as and when for myself, friends and family, made a much better return than letting, and avoided a large CGT bill when I sold up.


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