Help! conflicting advice from accountant and solicitor

dirtbag_2 · 30 March 2005 at 7:38PM

Please help as soon as poss as am due to sign papers this Friday.
Late father left house (£140k) to me and brother who lives in South Africa.
Could not sell so i decided to buy my brothers half and rent out property myself. Have arranged interest only buy to let mortgage on the property of £70k to pay my brother.Solicitor advised that we do a deed of variation on late fathers will so that I am sole beneficiary. (Not sure of reason why but think it has something to do with saving on stamp duty).
Saw accountant last week who said that the mortgage interest may not be tax deductible as it will be raised on a property that I already own as sole beneficiary in my fathers (varied) will.
I phoned the IR today and they said if the mortgage is raised on the property, the interest is tax deductible. Can this be right.?? I am confused and am inclined to trust the solicitor but the accountant seemed to know her stuff too. Appreciate any help you can give.

Xbigman · 31 March 2005 at 3:21AM

I'm definately not an expert on this but when my father died I had to buy my brother out and the solicitor advised us to have the house put in joint names first, then 'buy it' from my brother just in case I wanted to rent it out.

I think your accountant is right, at least in as much as you will have to go through the aggro of convincing the IR you didn't just raise a 50% mortgage to avoid tax.
Regards

X

Rafter · 31 March 2005 at 10:08AM

Although I'm no expert I'm sure the accountant is just covering herself. There might be a small risk that the IR would query it if a full investigation were done.

However, standing back from the situation, if you were paying your brother out of savings, your tax bill on savings would go down, but you would pay tax on the property rental profit - so swings and roundabouts.

If instead you use a morgage to raise the funds for your brother why shouldn't you be able to offset the interest cost against your rental income? Any other setup would be very unfair since you would still be paying tax on your 'savings'.

In fact, if you have a mortgage on your main property, you may be better off taking out a maximum buy to let mortgage on the rental property, particularly if you pay higher rate (40%) tax and repaying some of your main mortgage, since there is no tax relief on mortgage interest on your main home any more.

Doing some rough sums, you could probably save £500 a year by doing this, as long as you have an existing mortgage on your own home and are paying higher rate tax.

Say you have to pay 6.5% on a buy to let mortgage and are paying 5.5% on your main mortgage. Because you are paying your main mortgage out of taxed income this is an effective gross rate of 9.1% if you pay tax at 40%. You are therefore better off paying off your main mortgage and mortaging your buy to let property to the maximum (usually 75% on a buy to let mortgage).

Good luck.

R.

WHA · 31 March 2005 at 12:48PM

Unfortunately, I don't agree with your accountant - the IR are quite correct in this case. It always used to be the case that you had to actually "use" the loan advance to buy the property, but recent changes in legislation no longer require this. There was quite a lot of discussion about this on https://www.accountingweb.co.uk a few months ago. Basically all you need is to show that you have a loan which is less than the value of the property - it is now quite common for people to remortgage their own home to buy investment property rather than paying higher interest rates on buy-to-let loans secured on the investment property. You do have complications with the will deed of variation etc., but I don't see why that should prevent the application of the normal rules.

Cook_County · 31 March 2005 at 4:50PM

The "accountant" is out of date. Is he/she a Chartered Tax Adviser? The rules are that deductions can be claimed as a business expense. These are clear. I wouldn't use the "accountant" if the advice you are getting at the beginning is incorrect.

Xbigman · 31 March 2005 at 5:12PM

So you need to ask your accountant if she is aware of the recent change in the law. If not theres your answer.
Then check with your solicitor if he is aware of the change and is that why he is telling you to vary the will (he should say yes).

You are then fine to proceed with the variation.

Regards

X

cash99 · 31 March 2005 at 7:33PM

I've deleted my earlier post as it was totally wrong. The new rules ( although they seem to stem from the 1995/96 finance act) do allow you to borrow up to 100% of the value of the property when it is first let, and claim tax relief on the interest.

Help! conflicting advice from accountant and solicitor

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