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

Hi Mark,

Yes, in your example the purpose of the loan is to repay the capital that that has been invested into your rental business. Therefore tax relief on the loan interest may legitimately be claimed. It does not matter what you spend the money on or what the loan is secured on.

Perhaps Neil could also comment on this:

I have read that tax relief can only be claimed up to the purchase price of a property. So that if you bought when prices were lower and remortgaged later after prices rose for a higher amount then tax relief on the whole of the new mortgage is not allowable (unless it is reinvested on other property obviously).

@Joe Bloggs - my understanding is that if the extra money raised is reinvested back into the business then the mortgage interest on that can also be offset, whether or not it is immediately invested into another property. The key here is that the landlords capital account must have a positive balance. Therefore, the money could just sit on deposit if it is intended to be used for business purposes. as soon as the capital account goes overdrawn though interest on the overdrawn amount must not be used to offset rental profits. Neil is my accountant so he keeps a very close eye on this for me. It's another benefit of employing a good accountant who doesn't just complete tax returns but also runs balance sheets and capital accounts.

@Neil - thank you for commenting. Most landlords I speak to try to do things on the cheap. You're not cheap but I will continue to use your services for as long as you save me more than you charge me. 11 years and counting - well done and thank you 🙂

@Sarah - sorry if I misunderstood your previous comment. I think my response to Joe might well have answered your question and hopefully Neil will confirm that my explanation is also correct.

Sarah, you can only borrow up to the value when the property was first let.

Jason

hi mark
thanks. are you referring to ltd companies or properties/loans held personally?

Hi Sarah,
Assuming the property in your example was initially purchased as a BTL, then in most circumstances the loan interest relief claim is restricted to the purchase price (plus qualifying improvements costs) of the property. If a new loan results in all of the loans exceeding the purchase price (and the excess funds are not used to buy a further BTL) then part (not all) of the loan interest is disallowed. As Mark mentions above married couples may be able to structure their affairs to legitimately claim more loan interest relief. In addition the answer would be different if the property had been your home prior to letting.

Yes Mark you are correct, loan interest may be claimed providing the capital account is positive. We always prepare a balance sheet when looking at your rental profits to ensure that the maximum claim for loan interest may be claimed, regardless of whether you have used the money to increase your BTL portfolio or purchase a new car.

Joe - I'm referring to properties personally held.

Hello and thank you all for your comments. I have had to read them a couple of times but it is sinking in now. My original plan is seriously flawed it seems. If I continued with that route I would suffer heavily by having to take a 40% tax hit on the deal on over 10 - 13 years that would be £40K lost in tax, which is a really poor deal for me and not one I can accept.
I am single , never been married (and quite a good catch ladies ;-)) and dont own a limited company.
It seems that my only option is to go the long way round and take out two mortgages. One on my current home to put a loan on the property and one on the new home to bridge the deficit from Loan 1 plus my own deposit.
My home has been appraised and I have been told that the maximum rent I could get for it is £850 pcm based on the town I live in. Its very much a working class home in the North West UK.
So I know the rental income that can be achieved, but how does this affect the amount I can borrow against this home?
Do I have to go down the BTL route for my remortgage? Or can I get a residential loan on it at lower interest?
Surely I will have to declare that the purpose of the loan is to put down as part deposit on the new home? Which surely then ties me to BTL only deals?
Second Mortgage I would hope would be much more straight forwards as I would have a hefty deposit for that property.

Am I on the right tracks now?

Thanks for the help so far,

PS Cheer up Sarah

@Hotpl4te re; mortgage planning, you have said "One on my current home to put a loan on the property and one on the new home to bridge the deficit from Loan 1 plus my own deposit. My home has been appraised and I have been told that the maximum rent I could get for it is £850 pcm based on the town I live in. Its very much a working class home in the North West UK. So I know the rental income that can be achieved, but how does this affect the amount I can borrow against this home? Do I have to go down the BTL route for my remortgage? Or can I get a residential loan on it at lower interest? Surely I will have to declare that the purpose of the loan is to put down as part deposit on the new home? Which surely then ties me to BTL only deals?"

Ok, a few different points there, which I'll try and comment on as follows;

If you keep ownership of your current home, but move out and then rent it, you are essentially doing a “Let to Buy” (ie a LTB not a BTL). Yes, the amount you could raise against this property would be based on the rental income achievable, although this will still only be up to the maximum possible LTV (loan to value limit criteria).

Also, some lenders don’t offer LTB’s, others will require you to have a minimum income, and others won’t allow you to raise money against your property anyway to use as funds for another property purchase. There are always a few hoops to jump through!

However, you are not just talking about BTL / LTB mortgages here. You are talking about a mortgage on your own home as well and this falls within the ‘regulated’ mortgage advice arena.

So my first suggestion is to have a detailed ‘face to face’ conversation with a regulated whole of market Mortgage Broker who knows the correct (regulated as well as BTL and LTB) strategies to recommend and also who therefore knows the ‘hoops’ and how the lenders work in order to provide the right mortgage solution(s) for you.

In summary therefore, yes you can (subject to credit status, income status, property valuation, etc etc) get a new mortgage on your current home and let it out (with the lenders absolute permission) and you can also get a new residential mortgage on your new home too (again subject to…).

By the way, BTL / LTB deals are not as punitive in rates and fees as you may think. In fact some resi deals are quite expensive too, for example did you know that a (residential) 2 year fixed 1.99% rate from Abbey (currently available in todays market) may seem like a very cheap deal but it comes with a 2.5% arrangement fee! When we make our recommendations they are based on ‘Total To Pay’ (TTP) which factors in all costs such as % rates, arrangement fees, valuation fees, cashbacks etc.

My point? Don’t just shop around on furrysupermarket.com type websites for headline rates (a very wrong move in my opinion), but contract with a professional Adviser for the whole ‘total to pay’ picture.

And also, of course, work closely with tax advisers and landlord focused solicitors too.

Howard

Hello and thanks again for your comments.
I am currently starting the process of trying to raise money on my current home, and then topping up with my deposit and a new mortgage on my new home.
I have £50K as a deposit. Plus £10K for fees. moving expenses etc but that is the lot.
My current home is now valued at £225K. The home I am planning to buy is £220-235K.
My rental income for my current home is £850, due to location. The town I live in is very much working class in the North West.
The mortgage on my current home I will take for 20 years which is up to retirement and at this point I will sell it.
The mortgage on my new home I plan to pay off early so needs to be flexible like that.
My question is - how do I work out the "optimum" amount of borrowing on my current home (rental to be) property taking into consideration my deposit and new mortgage?
Is there some kind of limit or ideal number to work towards?

PS - Not married, just me involved, no dependents, 40% tax payer, totally debt free at the moment.
Thank you!