Tax relief on mortgage interest for previously unemcumbered property?

by Chris Unwin

12:13 PM, 24th April 2014
About 7 years ago

Tax relief on mortgage interest for previously unemcumbered property?

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Tax relief on mortgage interest for previously unemcumbered property?

I have a property which once upon a time had a mortgage on it and the property was let. I used to claim the mortgage interest as an allowable expense each year and everything was hunky dory.

Then it came to pass that I paid off the mortgage and could no longer claim any interest against tax. Later on I took a loan of 150K for 50% of its value (300K) on the property. The original purchase loan was 60K My understanding at that time was that only the original purchase loan interest could be used as an expense. Then the seed of doubt was sown in my mind as I noticed an article on this website that indicated that interest on a new loan could be offset against Tax. Is that in fact correct??

If so, does it matter what was done with the loan? About 70K was used as a deposit for another BTL property and the rest was used for non BTL purposes. My inkling is that only the 60K used for the BTL will be tax deductible.

Would welcome any learned views

ChrisFerrari


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Comments

Neil Patterson

12:23 PM, 24th April 2014
About 7 years ago

Hi Chris,

I will start with a disclaimer that I am not qualified or insured to give tax advice see >> http://www.property118.com/landlord-tax/

I do however believe that to receive tax relief on mortgage interest above the original purchase price it has to be provable that the loan funds were used for your business and not a Ferrari 🙂

You need an accountant but the 70K may be tax deductible but not the non BTL element. Eg If you raise money on your main residence for BTL and it is provable and separated from personal borrowing I have been told you can claim tax relief.

I am more than happy to be corrected by any experts out there.

Mark Alexander

12:31 PM, 24th April 2014
About 7 years ago

I must add the same disclaimer as Neil, however, I am entirely confident about my response

The answer to this question is that a loan up to the purchase price can be used for any purpose and interest can still be offset against rental income. Arrangement fees on the remortgage and also legal costs can be offset. The interest in the 70k borrowed to invest into other BTL's can also be offset against rental income.
.

NewYorkie

12:47 PM, 24th April 2014
About 7 years ago

I am considering re-mortgaging my main home in London for the purpose of letting and buying in Bath with the proceeds. I understand this is known as 'let-to-buy', and that this is allowable for tax relief against the rental income.

If it isn't, someone please tell me now, because the business case doesn't stack otherwise.

The big issue I'm struggling with is CGT when I eventually sell my London rental property.

I currently have 25% equity after living there for 8 years and spending a lot on extending, and expect that to increase as London prices continue to increase.

I believe I would have to pay CGT on the difference between the purchase + costs + extension(s)/refurb(s) and the sale price. Is there any relief I can claim for living there?

Neil Patterson

12:59 PM, 24th April 2014
About 7 years ago

Reply to the comment left by "Lou Valdini" at "24/04/2014 - 12:47":

Hi Lou,

You need to read our page "Capital Gains Tax relief on a property you have lived in" as you will find that very helpful with your question see >> http://www.property118.com/capital-gains-tax-relief-on-a-property-you-have-lived-in/ and possibly a good accountant.

I am less sure on Let to Buy, but it would make sense that you can claim tax relief up to the original purchase price however the loan beyond that is not for business purposes.

Again you need qualified and insured advice.

John Perry

13:39 PM, 24th April 2014
About 7 years ago

Reply to the comment left by "Mark Alexander" at "24/04/2014 - 12:31":

Mark

I think the more precise definition is that the interest on a loan up to the value at the date of first letting plus the cost of any subsequent improvements is deductible.

The purchase price can be significantly different to the value at the date the property was first let, particularly if the owner has lived in the property prior to letting or purchased the property then spent some time renovating it before letting.

We advise clients who are about to let a property they have previously lived in or renovated to obtain a valuation. This reduces the risk of HMRC contesting the value.

John Perry
http://www.centralbusiness.co.uk

NewYorkie

15:25 PM, 24th April 2014
About 7 years ago

Reply to the comment left by "Neil Patterson" at "24/04/2014 - 12:59":

Thanks Neil. The CGT article is very helpful. I will consult an accountant.

Does the response from John below clarify your uncertainty surrounding the qualifying value for tax relief? My reading is that if I take out a loan based on the value before initial letting (not purchase price) then the interest is allowable.

John?

Neil Patterson

15:37 PM, 24th April 2014
About 7 years ago

Reply to the comment left by "Lou Valdini" at "24/04/2014 - 15:25":

Hi Lou,

It sounds good and makes sense, but tax is always individual to each persons circumstances. Again I would not act upon advice from any one other than a qualified and insured accountant whom you have instructed.

Adrian Jones

16:16 PM, 24th April 2014
About 7 years ago

Reply to the comment left by "Lou Valdini" at "24/04/2014 - 12:47":

Hi Lou,

I live in Bath and own a few properties here. Bath has a big student population and lots of complaints from "ordinary" owners who say they cannot sell because they live in a student dominated area with the usual problems and Bath Council's restriction on issuing licences for HMOs.

Check the Bath Chronicle for recent articles.

Good luck.

NewYorkie

16:36 PM, 24th April 2014
About 7 years ago

Reply to the comment left by "Adrian Jones" at "24/04/2014 - 16:16":

Adrian, we have a place in Bath and know the student/HMO 'issue' very well, which is one of the reasons we want to move. Fortunately, we seem to have a property which is in demand. The real problem is finding somewhere to move to, at the right price. It's a seller's market and cash is king!

Chris Unwin

17:56 PM, 24th April 2014
About 7 years ago

Thanks Mark and Neil.

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