Interest deduction on BTL

mr_shinobi`

Hi

If you own a BTL property without a mortgage, is it possible to deduct a 'notional' interest expense on your tax return (based on arms length mortgage terms). The argument being that one could put a mortgage against a property to 'create' the interest expense - but is it really necessary?

I am sure I have seen this somewhere, but cannot find any mention of it on HMRC website. Or maybe, it is a load of old cobblers!

Thanks

stanleyunwin

No help, but have a similar problem so would be interested in the answer. I do have a mortgage on my main property but own the let one outright.

silvercar

It is the purpose of the loan that counts, not where it is secured.

So if you can show that you took out a mortgage on your main home to finance a BTL it should be allowed.

Pigmy

Yes you can. I called HMRC about this topic this week. I have a residential mortgage which I used to finance a let property. They said that as long as I could demonstrate a clear link between the money going out and the property being purchased, they didn't care where the money came from.

mr_shinobi`

Thanks for the info. So to clarify:

1) In order to deduct interest expense against BTL income, you would need to have funds borrowed somewhere at least (ie most likely your main residence).

2) Can anyone point to a link on the HMRC website that details this? It is not mentioned under the property notes.

Thanks!

Pigmy

I ended up calling them as I couldn't find anything on their website that clarified it.

You need to maintain an audit trail of where the money came from and went to. If you do get investigated you want to be able to demonstrate a chunk of money moving at the time you purchased the property.

silvercar

I totally agree with Pigmy.

But what you can't do is say, "if I had a mortgage I would be paying interest, so I will charge this notional interest, that I am not paying, as an expense to reduce the tax on the rental income."

You have to be paying the interest, wherever it is secured.

pie81

exactly. You can't deduct an expense that you are not in fact incurring.

mr_shinobi`

I think I have found it (sorry, could not post the link):

hmrc.gov.uk/sa/forms/net-08-09.htm

Form HS340 top of page 2.

In the case where you bought a new main residence, with a mortgage, would you still be able to offset the interest expense against your old residence (which you now let out, but is mortgage free)?

On reading the HMRC web page, I would say, 'yes'. But Pigmy's response from speaking with the HMRC suggests not....

You could sell the old residence to yourself, funding the purchase with mortgage proceeds - this demonstrates the cash movements etc, but that seems ridiculous (obviously you would not do this because of things like stamp duty etc).

Thanks

clutton_2

you cannot claim an expense that you do not have .... "notional" is not an actual expense is it ?

mr_shinobi`

It sounds like that is the case: "notional" interest, on a potential mortgage that could be put in place, but is not in place, cannot be deducted. Interest on an actual mortgage in place (eg against your main residence) can be deducted - although I am trying to clarify how tightly you need to demonstrate that funds drawn against your main property have been used to fund the purchase of a rental property. It comes down to timing, I guess.