high interest only mortgage - is it worth doing ??

MarkyMarkD

joepubli wrote:

Actually this isn't stricly correct. You CAN increase the mortgage on a property and have it allowed for tax PROVIDED the increase does not take it above the market value of the property when the "letting business" starts. So if the property is worth £200k - loans upto this wshould be tax allowable. However if subsequently the value goes upto £300k you can't offset nother £100k of mortgage interest as the gain is pos the business period.
All very complex!
Joe

Spot on, Joe.

It's OK to take money out of the property PRIOR to the commencement of the letting business, as you point out. But you arguably can't do so AFTER the commencement of the letting business, even if it's within the original value of the property. The HMRC guidance is clear that you can't use borrowings (on which you wish to offset the interest against rental income) where you've drawn out money from the rental business:

Similarly, the interest on a loan or overdraft may not be allowable, or only part may be allowable, where the borrowing is, for example, used by the taxpayer:

* to buy non-rental business investments (which may be shown in the balance sheet as assets),
* to buy private assets or assets for their family,
* for the provision of private funds to be taken out from the rental business.

Deciding what interest, if any, can be deducted may be difficult, particularly where the taxpayer’s account with the business is overdrawn. That is, where the taxpayer has drawn out more money than the profits of the rental business. The loan may have, for example, partly financed the rental business and partly met private living expenses. Interest on a borrowing that is used to fund private living expenses or other non-business expenditure isn’t allowable.

joepubli

MarkyMarkD
Can you give me an Inland Revenue reference/link for that. My understanding is that you can do what u like with the money and withdraw it from the business as long as the value of the mortgage doesnt exceed the value of the property when the business started.

Its a complicated area and I dont know how many times Revenue go into the nitty gritty of it with modest investors. Of course that's no reason not to be careful.

MarkyMarkD

It was from a search on the HMRC site:

http://www.hmrc.gov.uk/manuals/pimmanual/PIM2105.htm

Helpful tip - if someone provides a large quote, putting a large section of the quote into Google in quotation marks will usually find you the source. It works for this one!

I'm not disagreeing - I understand what you are saying about withdrawing the money before the business starts and I'm sure you are correct. But after the business is in progress, you can't go withdrawing excessive funds and still have the whole loan tax allowable.