Tax on a rental property

Pigmy

Hi,

I'd be greatful for any advice - I have resently bought a house to rent out. I have funded it through my residential mortgage (it is an offset mortgage at 1% above base rate which I had paid off). So I drew down the value of the rental property and am now renting it out.

However, when it comes to my tax return, can I offset the interest on the mortgage loan against income for the rental property. Ethically it seems a fair thing to do, however I get the uneasy feeling that the tax man will see it as 2 separate properties and therefore not interchangeable!

Any advice or ideas on avoiding additional tax costs greatly appreciated!

silvercar

There is no obligation to secure the loan on the property being let out, so you can take a residential mortgage to buy a rental property. At the height of the BTL boom, people would increase their main mortgage to fund a deposit and take a BTL mortgage for the remainder, both the increase on the main mortgage and the BTL would be eligible to be considered as expenses of the letting. (The interest only, not any capital repayment).

What you have done is similar, you have secured the funding by way of withdrawal from your main home loan. So the interest payments are only incurred because of the letting business and so should be a legitimate expense.

The only grey area is that the loan facility already existed, though you weren't using it. When people increase their mortgage to fund letting they generally declare to the lender that the purpose of the loan is to fund property. In your case, there is no requirement to tell the lender the purpose of the withdrawal - as it is your pre-agreed facility (and would mean people phoning their lender every time they bought a coffee in starbucks funded from their mortgage current account). Offset mortgages didn't exist when the rules on rental expenses were written, so you won't see guidance written in black and white.

I would think you are OK because the interest payments are only made as a direct result of your letting activities.