Rental & Mortgage question

Mr_Bigglesworth_2

I'm wondering if anyone has had any experience of this (looking for tax efficient offsetting of mortgage against rental ):

I have unencumbered house A.

I want to buy house B which I intend to inhabit, and then rent house A.

To fund purchase of house B I can either sell house A, take a buy to let mortgage against house A or take a residential mortgage against house B.

As the residential mortgage is cheapest way of doing this, it makes sense to take that one out, but I was wondering if there was a way of doing some internal 'back-to-back' lending some of it against house A so I can deduct interest expense on mortgage from the rental income.

I'm not sure if this is just not allowed or if its in grey territory or if it would be allowable if it was proven to be in line with reasonable commercial terms, i.e. max 75%LTV and 1.25 rental income cover.

Any experience?

ceh209

You have the right idea with deducting mortgage interest from rental income...

However i think (and someone else can confirm), that this also covers mortgage interest on the mortgage you 'had' to take out on House B because you were renting out House A.

If that's the case, definitely go for the residential mortgage!

Pennywise

You can claim interest arising from ANY borrowing against the property rented out. There is a limit being you can only claim interest on borrowings of up to the value of the rented property when you started renting it out. So if property A is worth £200k and you take a mortgage of £250k for property B, you can only claim 4/5ths of the interest. If the mortgage is less than the value of the property let out, you can claim it all, and you can also claim for any other loans you may have, i.e. for a car or whatever. Just remember it's only the interest you can claim, not the capital repayments nor the payment protection insurance.

Mr_Bigglesworth_2

Pennywise wrote: »

You can claim interest arising from ANY borrowing against the property rented out. There is a limit being you can only claim interest on borrowings of up to the value of the rented property when you started renting it out. So if property A is worth £200k and you take a mortgage of £250k for property B, you can only claim 4/5ths of the interest. If the mortgage is less than the value of the property let out, you can claim it all, and you can also claim for any other loans you may have, i.e. for a car or whatever. Just remember it's only the interest you can claim, not the capital repayments nor the payment protection insurance.

That is what I was thinking as far as I know the lending doesn't need to be directly linked/tied, but does need to be wholly and exclusively.

So if I said I it is set out as financing to fund across whole portfolio (all of house A and some of house , but secured against house B to gain the best rate, in my mind that should be ok.

That would be a significant help financially and save me having to sell house A now!!

Do you happen to have a link to the relevant HMRC note?