BTL: Mortgage interest expense

starM

mmm - interested - what about if someone taken out a residential mortgage for a BTL property - can they still claim interest as an expense on there tax return?

Elaine_Wilson

Cashmore, I see the position like this. You have a mortgage of £100,000 which you used to buy a flat. You have a separate savings pot of about the same amount. Although this pot is taken into account when First Direct calculate the interest charged on the mortgage it has not been used to repay any of that mortgage. Your interest payments are currently zero.

So, when you rent out the flat you will be paying interest on money used to buy it so the whole amount will be allowable. You can only claim interest that is actually paid, though, and FD will calculate this on the balance after the offset, i.e. £50,000.

starM - relief is granted on interest paid on any loan. It doesn't have to be a mortgage. There is no difference in this respect between a residential mortgage and a BTL one. That is purely a commercial matter where the lender applies different terms to reflect the change in the risk.

starM

Elaine_Wilson wrote: »

starM - relief is granted on interest paid on any loan. It doesn't have to be a mortgage. There is no difference in this respect between a residential mortgage and a BTL one. That is purely a commercial matter where the lender applies different terms to reflect the change in the risk.

Are you sure?
Found this:- http://www.accountingweb.co.uk/item/199161

someone stated:-
The new mortgage was clearly taken out to finance the purchase of the new property.If client had instead raised a mortgage on the BTL property and then taken the cash out to purchase the second property then interest may have been allowable. The very fact that the client chose to take the cheaper option (domestic mortgage rather than BTL mortgage) strengthens the argument that the new loan has nothing to do with the rental business.

MS

Elaine_Wilson

I think my answer still stands but I may have misunderstood your question.

You asked

what about if someone taken out a residential mortgage for a BTL property - can they still claim interest as an expense on there tax return?

I took this to mean that a person has bought a buy to let property using money raised from a lender. The lender granted a residential mortgage. (Sorry if that sounds stilted but I'm trying to pick my words carefully.)

This would mean that it is clear the money was used to buy the property being let. I believe the interest is therefore allowable.

In this case the lender might have an issue as there may be complications with repossession if there is a tenant.

The accountingweb example has a person owning a mortgage-free property which is their residence. They move out and start renting it. They then buy another property which is not let but becomes their residence. This has been bought with the mortgage secured upon it. The expenditure was clearly to fund a private purchase and there is no real connection to the let property.

The suggestions were that the mortgage should have been raised on the let property. This would have given the rental 'business' a surplus of cash. This cash could have been withdrawn and used to buy the new private property.

Does that explain my view better? If I've got the wrong end of the stick can you reword your question?

silvercar

I agree with Elaine_Wilson, if you have a mortgage that is funding a BTL, where ever it is secured, its an allowable expense.

You can't legally take out a residential mortgage secured on a property you immediately intend to let - that would be obtaining money by deception = fraud.

If you already had a residential home with a residential mortgage and moved out and let it, you could then claim the interest as an allowable expense. You may well be breaching the terms of the mortgage, but that is a contractual matter between landlord and lender, not something that the revenue would care about. If you had "consent to lease" from the lender then it would be kosher and a resi mortgage that would be an allowable expense.

BTW if you dig around on the web, you will find opinions that disagree with the quote from auctionweb. There are views that mortgages upto the value of the property when first let are allowable expenses, where ever secured.

Anon

silvercar wrote: »

I agree with Elaine_Wilson, if you have a mortgage that is funding a BTL, where ever it is secured, its an allowable expense.

A couple of quick questions if I may.

Firstly, I have followed discussions on here and related threads and understand the above point. If the actual mortgage/loan is in the names of Partner A and Partner B, but physically being paid monthly by Partner A, and the rental business (and properties) are in name of Partner B, does it make any difference on the mortgage interest being allowable or not against the income tax?

I can see that it would make sense for all property related expenses to be made by Partner B to make it completely clear as a business, but in terms of mortgage interest, insurance etc. if it is paid by Partner A does that mean they are no longer claimable ...? And given this scenario, and the answer being "no they aren't claimable as they should be in the name of Partner B" is there a way to correct it in the accounts ...?

Secondly, if you re-mortage to get a cheaper deal and are faced with early redemption penalties, can this penalty/"interest" be charged against income tax?

Many thanks

Anon

Anon

Thirdly (following on from the above message), "if you have a mortgage that is funding a BTL, where ever it is secured, its an allowable expense" - how would this be recorded in a tax return and accounts please? For the former it is simply a cost of finance (as no other details need to be provided to HMRC unless asked?) and the latter needs to be reflected in a simple capital account for the rental business?

Fourthly, if the amount of the offset mortgage is reducing each month (paying it off rather than putting in a savings pot) and therefore also the interest, how would this be recorded in a capital/the rental business accounts please (as the original mortgage amount would no longer apply)?

Finally, I read elsewhere on the web that you have to tell the mortgage lender the purpose of the loan in this scenario (though it may be my or their misunderstanding). Surely, for the mortgage company's purposes, the loan has bought the "home" which it is secured against (therefore a normal residential mortgage), however, does it then need reporting to them that you are offsetting the mortgage payments against rental income from elsewhere (which in the scenario discussed on this thread may be the actual purpose)?

Many thanks

Anon

silvercar

For your thirdly and fourthly, we run everything through our ordinary current accounts. An excel spreadsheet keeps track of what is attributable to the BTL. With the offset, the basic rule is that you can only claim interest as an expense where you have paid that interest. So if the capital amount outstanding is reduced to below the value of the property when first let, you need to reduce the interest claimed to be an expense.

Your "finally": You would tell a lender the purpose of a loan when you first take it. You wouldn't go back to the lender if the purpose changes. eg, I have an offset mortgage, if I buy a coffee in Starbucks and pay with the cashcard attached to my mortgage, I wouldn't phone the lender and OK the coffee. I know that is a ridiculous example but the principle applies, I took a residential mortgage, built up a pot in the offset and can spend it as I see fit. The original purpose of the loan was to buy the property, the lender wouldn't want to know any more.