Allowable interest against rental income?

laurence2163

A friend owns a flat with no mortgage outstanding. He is considering buying a new house to move into. Basically he was looking to take a buy to let mortgage out on the existing flat and in effect use that money as deposit on the house and supplement the purchase with a normal mortgage.

His mortgage advisor has just written to him stating

"Interest payments on mortgages taken out to buy or improve a rental property, can also be claimed as a tax deduction against the rental income received. However, this may cause the problem as you currently have no mortgage on your existing flat.


I hereby confirm that you would be unable to deduct the monthly mortgage interest payments, should you decide to raise finance by re-mortgaging your flat and then using the proceeds as the deposit for your next property purchase."

Now I am an accountant (not tax specialist though) and I would have thought that the interest on the remortgaged flat was allowable as that loan is enabling him to conduct his new rental business (as without it he wouldn't be able to retain the flat) so in effect could be argued that it is wholley and exclusively business expense.

Any thoughts guys? Thanks in advance.

cash99

This is a very common mistake, even amongst accountants, let alone mortgage brokers. The rules the mortgage broker is quoting do not apply after 1995/96.

Interest is allowable as a deduction for re-financing a rental business. Profits of a rental business are taxed under schedule A but calculated on schedule D basis.

The interest deduction will only be allowable up to the value of the capital in the rental business, typically the market value of the property on the day the rental business started. The loan does not have to be secured on rental property, it could be secured on the new house, probably at cheaper rates than a btl mortgage.

Check accountingweb or taxationweb, where there are lots of posts covering this. There is also a clear reference to this in the HMRC manuals see: http://www.hmrc.gov.uk/manuals/bimmanual/BIM45700.htm

Your friend should speak to a tax accountant, before proceeding.

Chrismaths

schedule A and D have been abolished. Now property is taxed under "ITTOIA Part 3" (Income Tax (Trading and Other Income) 2005), and employment under "ITEPA" (Income Tax (Earnings & Pensions) Act 2003). I know because I was studying for a tax exam at the time, had learnt all the schedules, then got an update 1 month before the exam that changed everything. :eek:

Nothing actually changed though.

poopscoop

Does this mean when purchasing a BTL property to do it on an Interest Only basis? Why not Capital & Repayment so you can pay off the capital aswell?