Conflicting advise on interest relief holiday let

heleen

I have had conflicting advice from the Inland Revenue and my (normally very good) accountant and I just want to double check before I act.

I have 2 homes: my primary home which is mortgage free :j and a holiday home that we have for own use but also rent out as a holiday let and there is a mortgage on that.

To date I have deducted a proportion of the interest payments ont he mortgage from income from the rental oin accordance to the rules. However, the problem is my mortgage is with Northern Rock and will go up by 3% in December. I have been looking around for a new mortgage but as it is a holiday let nobody is willing to take it on out of principle.

What I want to do is to remortgage my main house (which is easy and cheap) to pay off the holiday home. The way I see it is tht this is a loan that is beign taken out with the only purpose to be used for the holiday home, but just the loan is just secured on a different house.

In this way, I should still be able to deduct the interest payments on that loan from the rental income on the other home.

HMRC say yes, my accountant says no.

Who is right?

Yes, I have hear it form the horse's mouth and should go ahead with it, but I am worried that I will just have spoken to the one guy who got it wrong and it will bite me in the bum some day. As it's worht about £4000 per year, I dont' want to get this wrong!

Thanks for any help

Heleen

Treading_Water

Hi Heleen
As long as the Mortgage is taken out for the purpose of the holiday let (or you only claim that proportion of it that is) then HMRC advise is correct. It can also not exceed the value of the property at the time you started renting it out.
TW

heleen

Thanks for that.

I intend to do the following :
- keep proof that main residence has been paid off
- take out mortgage on it for £275k (LTV ca 40%)
- get lawyer to take a statment of purpose of mortgage
- pay off 2nd home mortgage £275k. Value of 2nd house is circa 365k.

If anybody can see anythign wrong with this or anything else I would need to do to make sure I can continue to deduct interest for holiday let please shout!

Heleen

jimmo

Two things strike me. I think you are OK but if you want to dot the is and cross the ts:
1) The maximum amount of the loan you can claim interest on is the value of the holiday home when you first starting letting it. The current value of the house is irrelevant for tax relief purposes. That was mentioned by treading water and is important.
2) You can only claim the business proportion of the interest. You cannot claim the interest attributable to private use.
Apart from that your idea of making a statement to a lawyer is entirely superficial and unnecessary. Don’t waste your money on that.
The facts will speak for themselves. The value of the let property at the commencement of your lettings business is a question of fact. Your lettings business can borrow money up to that value.

heleen

Thanks for supporting the previous advice. Beign able to do this will save us £4000!

Yes, the mortgage is significantly lower than the value of the property when first let.

Yes, I intend to only deduct 2/3rd of the mortgage interest to reflect a certain level of personal use (way below 1/3rd of the time).

Woohoo!:j

dunstonh

It is very common for property investors to borrow against their primary residence rather than the let property. There is absolutely no reason for it to raise any eyebrows. Just keep the redemption statement on the let mortgage and the statements on the new mortgage as they show an audit trail if you are ever asked to provide evidence.