Buy to let Tax

[bigbaddom]

Following on from the other thread about what the guy shuld do with his 300k mortgage, I'm going to ask for some advice...

I have a flat paid off in full which is worth around the 250k mark.
It is currently rented out for 950 a month.

I am about to purchase another flat, closer to where I work, for around the same figure. I will however need to borrow around 50k.

I obviously want to minimize any income tax which has to be paid.

I thought that I could mortgage the new property and use the rent to pay the interest lowering my tax bill. However from the previous thread it looks like this is not possible. I also looks like I am not able to remortgage my btl property to lower my tax bill either.

If it makes any difference the BTL has always been just that. A rental property. I have never taken residence.

Thanks guys... Hope I can get out of this pickle...

[JagLover]

What previous thread?.

It is my understanding that interest charges on a mortgage taken out on a buy to let property is allowable against the income from that property, whatever the purpose of the money raised.

As long as the mortgage debt does not exceed the value of the property.

[Eric Mc]

Would it not depend on what the interrest charges related to?

If you borrow additional funds using an already existing "buy to let" property as collateral/surety for the loan but use the borrowed funds to non-tax releivable purposes - like buying a private car, or funding your personal lifestyle, or even buying your own home - then the interest cannot be claimed for tax purposes.

Edited by Eric Mc on Friday 9th February 13:07

[JagLover]

I read some interesting guidance on this recently Eric. It was actually given out at an ACCA meeting and brought in by one of my colleagues who are a member. Unfortunately it is in the other office so I can't type it out exactly.

From what I remember it claims that interest on a buy to let property should be treated the same as a loan taken out by a self-employed business and only disallowed if, as with the self-employed business, the capital account is overdrawn. If you look at the 'balance sheet' of a buy to let property you have an asset, the property itself, and the liabilities, the mortgage, as long as the mortgage does not exceed the property value, by the accounting equation the capital account is not overdrawn.

Some IR inspectors will dispute this interpretation, but if you argue the case with them they will have to accept it.

I will not be in that office again until next wedenesday. If you remind me I will post up its summary then.

[Eric Mc]

I'd love to see that article

It was always my understanding that interest charged to a business profit and loss account would need to be restricted if there was a "non-business" element to it - in order to comply with the basic "wholly and exclusively for the purpose of the trade" requirement.

That meant, for example, that car loan interest should be restricted in the same manner as car running expenses - by the private use fraction or percentage.
The restriction on loan interest due to overdrawn proprietor Capital Accounts is based on the same principle.
The latter has always been rather contentious, the Revenue's argument being that an overdawn Capital Account indicates that working capital amounts borrowed by the business were partially to fund the proprietor's private lifestyle as well as the business itself That is sometimes true, but not always - and may be the case even if the Capital Account ISN'T actually overdrawn.

Since the introduction of the "New Schedule A" rules for computing rental income and profits, I was of the understanding that the basic principles of trading accounts were now underlying rental accounts - which would imply similar treatment of "non-rental" related costs.

Just my interpretation of the rules.

[billsnemesis]

There was some confusion a little while ago because HMRC had different treatment depending on whether you bought into a BTL or reversed out of your main residence

I did the latter and they claimed that the increased mortgage on my flat was to fund the purchase of my new residence so they would only allow me the amount of the original mortgage

They did eventually change their policy as in reality the additional loan was taken out to retain the flat as an investment, not to buy the house.

Now you can extract additional capital up to the amount of the value at the time it changed from residence to investment because that it just extraction of original capital

If you are raising money to buy another investment it is a genuine business purpose and so interest on the loan should be permitted as a deductable expense.

[Eric Mc]

But only against income derived from the "other" investment - not against the original rented property.

[bigbaddom]

Ok, thanks for all the replies, Still a little confused though.
I bought the flat which is let out (and has always been let out) for 200k.
Can I get a mortgage for 50k on the btl flat and pay for the interest as an expense?

[Eric Mc]

I don't think your use of terminology is helping. Do you mean "claim the interest as an expense for tax purposes?

If so, what is the additional borrowing for?

The nature of the borrowing is the key point as to whether any claim for interest can be made to help reduce your tax liabilities.

Edited by Eric Mc on Saturday 10th February 18:59

[bigbaddom]

Yes Eric, your correct as usual, this is exactly what I mean. The new borrowing will be to purchase another flat, which will become my principle residence.

Thanks

[Eric Mc]

Right, that clarifies matter.

Interest in respect of a loan to purchase your only or main residence is not allowanle for tax purposes.

[Jaglover]

Hi Eric

If you want a copy of the document E-mail me your fax number and I will fax it through.