Second home tax relief

by Readers Question

14:26 PM, 28th May 2014
About 4 years ago

Second home tax relief

Make Text Bigger
Second home tax relief

Please help me … I am rather confused on this issue. Second home tax relief

I have paid off mortgage on my primary residence. I have now bought a second home with a mortgage. I am wondering if I can offset the interest on this mortgage against the rental income from my first home.

Any tax gurus out there?

Also what if I was to convert garage in new home and rent it out.

Would that make any difference?

Thanks

Jeremy



Comments

Mark Alexander

14:37 PM, 28th May 2014
About 4 years ago

Hi Jeremy

What you need is:-

1) A good accountant who can save you more than they cost you - see >>> http://www.property118.com/landlord-tax/

and a good mortgage adviser who knows all about these sorts of things - see >>> http://www.property118.com/introducing-mark-edwards/65509/

The straight answer to your first question is a simple one - "NO". However, given that your former home is now rented you may be able to raise a buy to let mortgage against that and offset the mortgage interest against your rental income. The proceeds of this new mortgage could be used to pay off the mortgage on your own home. A good accountant will be able to advise you on the tax issues and a good mortgage broker will be able to consider the overall viability, bearing in mind the mortgage on your new home may be cheaper at face value but more expensive after you factor in the tax advantages of the structure I'm suggesting that you investigate.

With regards to converting the garage in your new home, that is something entirely different. You may need planning consent and building regs approval and you may even be creating a new dwelling which will affect Council Tax. Alternatively, it may just go through as an extension and the letting may even qualify for the "Rent A Room" scheme whereby the first £4,250 of rental income is tax free each year.

I strongly recommend you to seek professional advice. Yes it will cost you money but it could well save you a lot more.

Good luck 🙂
.

matchmade

14:57 PM, 28th May 2014
About 4 years ago

Mark is correct.

For anyone thinking of doing something like this but in a different order, if you raise a mortgage or increase your current mortgage in order to buy a rental property - for example because you get a better interest rate with a residential mortgage - then you can offset the relevant proportion of mortgage interest on Property 1 against the rent received on Property 2. You have to be able to demonstrate that the extra debt was taken out for the purpose of rental investment only.

Mark Alexander

15:13 PM, 28th May 2014
About 4 years ago

Reply to the comment left by "Tony Atkins" at "28/05/2014 - 14:57":

and vice vera Tony, i.e. you can borrow up to 100% of the purchase price of a rental property and offset the mortgage interest against rental income REGARDLESS of what the purpose of the loan is. For example, you could remortgage your rental property up to 100% of the original purchase price (assuming lending criteria allowed) and blow all the cash on wine, women and song and still offset the mortgage interest against the rental income for tax purposes.

The key factor is the original PURCHASE PRICE. Effectively this means that you are only borrowing your own money. Even this can be manipulated though, for example the property can be sold at it's current value to a spouse without any CGT due to the transfer between spouses being exempt. The spouse could then arrange a mortgage for up to the new purchase price and offset all mortgage interest against the rental income. WARNING NOTE - the original purchase price and not the subsequent purchase price is used to calculate CGT on the eventual disposal so this isn't a way to get out of paying CGT. Also, Stamp Duty may be payable of the transfer between spouses so again, take professional advice from a licensed and insured professional before committing to a scheme like this.
.

jeremy irons6151

15:45 PM, 28th May 2014
About 4 years ago

Very interesting comments, so thanks very much for that. If i do sublet my converted garage (having been granted planning permission already to do so) would i not be able to claim at least some mortgage interest relief). I am a bit loathe to get a btl mortgage as the cost is much more.
I have also read somewhere that it doesn't matter where your loan is secured or even if it is secured for you to use it against a property?

Mark Alexander

15:53 PM, 28th May 2014
About 4 years ago

Reply to the comment left by "jeremy irons6151" at "28/05/2014 - 15:45":

Hi Jeremy

There is some truth in what you have read but it's not the whole truth and nothing but the truth.

HMRC will argue that 100% of the mortgage money you borrowed was secured against your home for the purpose of purchasing your home. On that basis there is no tax relief.

My original advice stands.
.

jeremy irons6151

16:04 PM, 28th May 2014
About 4 years ago

Okay..thanks....what about any other ideas....could i put either or both property under a limited company? And then rent property to myself or wife? Or is that just crazy talk!?

Mark Alexander

16:17 PM, 28th May 2014
About 4 years ago

Reply to the comment left by "jeremy irons6151" at "28/05/2014 - 16:04":

You would have to repay your mortgage to achieve that. The new mortgage would be at commercial rates. The rent you pay would come from your earned income and the rental income would be taxed as profit by the company. What's more, you'd struggle to get finance as the buy to let mortgage the company would need to buy the property would be for the purpose of letting to directors. What's more, the company would pay tax on any profits made on the capital value of the property when it is sold. All in all then - not a great idea!

My initial advice stands.
.

Jerry Jones

19:43 PM, 28th May 2014
About 4 years ago

Reply to the comment left by "Mark Alexander" at "28/05/2014 - 15:13":

As I understand it, the value up to which you can borrow is not th original purchase price, but th value at the time it was placed into the rental business. This is very relevant to me, as one of my rental props is a house that was my own home for 25 years before I ever started letting it.

Also, I discovered to my advantage that this is not calculated on a property-by-property basis but on the value of all the stock at the time it was added to the business added together. Handy because I have borrowed over 50k against houses I bought for 30k, while still being well below original value on some others. The result is that all my interest is still tax-deductible! Confirmed in writing by HMRC, who also allowed me a retrospective deduction, which was nice

Mark Alexander

20:38 PM, 28th May 2014
About 4 years ago

Reply to the comment left by "Jerry Jones" at "28/05/2014 - 19:43":

Hi Jerry

That is indeed possible, but again things need to be done properly. If you organised everything yourself you are a very brave man. If you took professional advice you are a very wise man 🙂
.

Jerry Jones

21:09 PM, 28th May 2014
About 4 years ago

My affairs are pretty simple. I use an accountant for the limited company annual return but the property is very straightforward. I do make sure the bookkeeping is done properly, though. This particular little wrinkle was easily dealt with by a letter to HMRC with supporting figures and OKed by return.

What I DO need to do is to draw up a balance sheet from my records so I have everything tickety-boo if I ever want to sell one.

Oh, and my NLA membership gives me insurance against an investigation, which is my big fear.


Leave Comments

Please Log-In OR Become a member to reply to comments or subscribe to new comment notifications.

Forgotten your password?

OR

BECOME A MEMBER

Shelter’s Head of Research misled public on TV

The Landlords Union

Become a Member, it's FREE

Our mission is to facilitate the sharing of best practice amongst UK landlords, tenants and letting agents

Learn More