BTL: Mortgage interest expense

Gorgeous_George

This is a purely hypothetical question.

You can claim mortgage interest as a valid business expense even if the mortgage is secured on your own home rather than the BTL property.

What if that mortgage was an offset? For example, your interest only mortgage is £100K and the £100K was used to buy the BTL. You then offset some or all of the £100K and the 'interest' earned is used to pay the mortgage. Would you be able to use the full £100K mortgage interest as a valid expense?

Would it be seen as tax avoidance or tax evasion?

GG

silvercar

We had a casual chat about this with a tax accountant.

Say you had a 200k offset mortgage and 100k was to pay for a BTL and 100k was for the residential mortgage.

If you had no offset savings than the interest on 100k would be an allowable business expense.

If you then had money in the offset savings of say 50k, you could justifiably say that, of the interest on the 150k that you are now paying, interest on 100k could be ascribed to the BTL and interest on 50k to your residential mortgage, as without the BTL you would have 100k more in the offset and so would only be paying interest on 50k.

You could continue this line of thought until the only interest you are paying could be ascribed to the BTL, 100k in this case. Once you pass this point and the total of your savings exceeds the residential mortgage, all the interest you are paying is ascribed to the BTL and could be considered an expense of the business.

I think you are trying to take this one step further and say that you would otherwise be getting interest on your savings pot and so should be able to charge ficticious interest as an expense of the BTL. The guys view was that this can't be done; for interest to be an expense you actually have to pay it. So in this circumstance you would be better off putting the savings (that would mean a reduction in BTL interest) in an account that pays real interest.

Would be interested to know if you can word it differently to make it an expense.

Sometimes it is possible to get the lender to operate the mortgage in a different way eg to charge interest on the full amount and then reduce the outstanding capital owed by an amount equivalent to the mortgage interest saving created by having savings in the pot. So in my example you would always be charged interest each month on 200k, but your capital owed would reduce by the interest on the savings. Then I suppose you could atrtribute the interest on the BTL portion to a BTL expense.

I do have an interest in this as my BTL has a mortgage but the deposit money comes from my main residential mortgage which is offset. At the moment the offset pot is not full, but I do hope to be fully offset in the next 5 years.

Gorgeous_George

My residential mortagge is with Britannia. I have an offset tracker rate currently at 2.24%.

The mortgage balance is £70K and I have offset savings of £35K. I get two statements from Britannia. One for the savings side and one for the mortgage side. The savings statement does not show any interest. The mortagge statement shows the mortgage fee (let's assume it's interest only) and the income from offset savings (acting as an overpayment).

If I had borrowed the money (on a residential mortgage using my home as security) but to fund a BTL, would the mortgage interest (on £70K) be allowed as a business expense?

As it is, my BTL is also a lifetime tracker at +0.89% so this question is purely hypothetical.

GG

silvercar

I would say you can claim whatever you have paid, as shown on your mortgage statement. So you wouldn't be able to claim the income from the offset as (a) if it is an overpayment it is capital and (b) it is not money you have paid out yourself.

I would have thought its all a question of reasonableness (is that a word?). on how much of the interest is due to you having a BTL and the way to calculate that is to compare it to your position if you didn't have the BTL. But I would add to that that you can only claim money you have actually paid.

For that reason I'm only going to top up the offset savings until I reach a point where the outstanding amount is equal to the BTL deposit.

Anon

Interesting deliberations gentlemen - I was also wondering about the point whether interest had to be paid to be claimed (which in my mind, I can see you would have to, but no harm investigating the options!).

On a few other threads I have noticed people saying that you don't want to reduce your mortgage interest payments too much (by offsetting, overpaying etc) as you will then have more tax to pay on the income. I appreciate that I could claim back against rental income any interest payments relating to the BTL (even on a loan secured on a different property). However, in my mind, if you were in a position to pay off the mortgage, then financially wouldn't it make sense (in the long run) to pay it off? I would be loathe to keep paying mortgage interest on a monthly basis just to reduce tax liability on the rental income, as by definition you wouldn't be earning any income which sort of defeats the object?

For example, if I had a mortgage of £100k, interest of 5% per annum, therefore roughly £5k per year (roughly £416 interest per month). If the rental income is also £416 per month, I make no profit, and pay no tax. However, if I pay off the mortgage (for the sake of argument, assume low interest in savings and earning much less than the mortgage rate), then I would be taking home, say £416 per month, -20% tax = £333 after tax (£4000 per year, or roughly 4% interest on my money).

I may be missing something? (I appreciate I am bringing together the rental business and the individual in this scenario, but at one level they are one and the same anyway and I would be loathe to be paying interest where it were unnecessary, and likewise, would still want to minimise tax liability for the business and the individual to keep as much as possible from the rent, savings interest and income overall!).

Many thanks

Anon

silvercar

I think you need to compare the two scenarios:

100k mortgage, all interest claimable and 100k in the bank. 416 rental income.

scenario 1: keep the mortgage.

mortgage interest at 5% = 416 per month, 416 rental income. 416-416=0.
100k in the bank, interest at 5% = 416 less 20% tax. net = 333

total = 0+333=333.

scenario 2: pay off mortgage.

rental income= 416. all taxable at 20%.

net effect= 333.

So with interest rates on a mortgage equal to the interest on savings, it makes no difference.

Now if the savings rate is only 2%, scenario 1 changes:

scenario 1: keep the mortgage.

mortgage interest at 5% = 416 per month, 416 rental income. 416-416=0.
100k in the bank, interest at 2% = 176 less 20% tax. net = 141
total = 0+141=141.

making scenario 2 more attractive.

Anon

Thank you silvercar - I thought as much - clearly once you make the decision (scenario 2) then you are stuck with it (though there is something attractive about being mortgage free). If it were an offset account, then you may still have access to it (if you put it into the offset side, rather than pay off completely) but I suppose in that scenario the mortgage and savings rates would still be the same.

Anon

silvercar

Anon wrote: »

Thank you silvercar - I thought as much - clearly once you make the decision (scenario 2) then you are stuck with it (though there is something attractive about being mortgage free). If it were an offset account, then you may still have access to it (if you put it into the offset side, rather than pay off completely) but I suppose in that scenario the mortgage and savings rates would still be the same.

Anon

Its a good point, once you have cleared the mortgage, the costs of taking a mortgage out again would be prohibitive. So you are really guessing on whether your savings rates can exceed your mortgage. Only rarely I would guess - if you have a fixed savings rate and a tracker mortgage when rates are low or when you have high interest rates and a fixed low rate mortgage.

Then again for someone without a large pot of savings, a mortgage will be the cheapest form of borrowing.

Anon

I am reviving this thread as I have a related question please. Notwithstanding the comments above about interest having to be paid to be claimable, I notice in my First Direct statement (yes, we proceeded!) that it shows:

mortgage Interestinterest after offsettingvalue of offset


As a result, could you claim the "mortgage interest" as by definition isn't the value of the offset (ie the difference) technically the interest on your savings? And if the answer to this is yes, then it would then make more sense to keep the money in the savings part of the account rather than paying off any of the capital as that way the mortgage interest is maximised to claim back against tax (though the actual interest paid is the same)?

Anon

Elaine_Wilson

Just to be clear on this suppose you have managed to save an amount equal to a quarter of the mortgage. Then I assume the statement will show mortgage interest of (say) £400 and interest after offset of £300.

As I see it the figure for "mortgage interest" is only a theoretical one designed to show you how much you are saving by using this account. The interest paid is only the £300 in my example. In other words, the netting off is done to the capital (and interest calculated on the reduced figure) and not to the interest.

Anyhow, I don't see how most people would be any better off by claiming the £400 figure as they would then have to include the £100 as income, so overall would only be getting relief on the net £300.

cashmore_2

I am not quite sure if the answer is buried in this thread, if so I didn't undestand it

The background to my question is this:

I currently own a flat which is mortgages with an Offset with First Direct for say £100k. And it is fully offset at the moment. I am about to move into a new house with a new mortgage from a different lender and make my flat a BTL. And will use half of my offset amount (£50k) as capital in the new mortgage, and keep the First Direct Offset for the BTL.

What I am trying to figure out is whether or not I can claim the entire mortgage amount (the full £100k) as an allowable expense against the rental income, or whether I can only claim for the £50k.

My argument is that I should be able to claim the full £100k because I am lending myself the other £50k.

Does anyone know what the HMRC position is on this?

Thanks