Tax relief on rented property

Alan_M_2

Innys wrote:

Silvercar - I'm not disputing that the interest on the mortgage for the rented property (or properties) is allowable. The fact is, the only reason the mortgage was taken out was to fund the rented property and, therefore, it makes sense that the costs should be deducted from the rental income.

However, why should the interest on a mortgage which has nothing to do with the rental income be an allowable expense? Taking it to the extreme, why should a landlord not borrow against their rented property and use those funds to but a holiday, car, speedboat, private jet or whatever? Just think of the scope for abuse!

I would, therefore, disagree with your point that what the loan is secured on is immaterial.

What the loan is secured on is completely irrelevant, it's what the money is used for that defines it's tax liability. If the mortgage was used to fund a jet for instance, if that Jet is being used either as a business or as part of a business then the loan interest is deductable.

If they've taken out a mortgage to buy an Aston Martin (and I actually know someone who's done this) it's a cheap way of borrowing £100,000 as a personal loan, but as the vehicle is personal and for non business related activities, the loan isn't tax deducatable.

Tassotti

DB9? Vantage?

Innys

I think Alan M has made the point that I was trying to.

Thanks Alan

Tassotti

I thought you were saying that it can't be done

It can...I have...Nice new motor out of it

rsbright

I've just had this from my accountant - seems you can use the money for anything! She did say however, that this could of course change at anytime!


'Although in fact the tax legislation still says loans should be for purchase or improvement of the letting property the Revenue manuals treat letting as a 'letting business' so borrowing against the business asset (the let property) & taking the capital from the business is allowed, so you effectively would get relief for loan interest against the rents.'

Alan_M_2

Tassotti wrote:

DB9? Vantage?

Actually a DB5, in silver - I think He has a James Bond Fetish.:rotfl:

Alan_M_2

rsbright wrote:

I've just had this from my accountant - seems you can use the money for anything! She did say however, that this could of course change at anytime!


'Although in fact the tax legislation still says loans should be for purchase or improvement of the letting property the Revenue manuals treat letting as a 'letting business' so borrowing against the business asset (the let property) & taking the capital from the business is allowed, so you effectively would get relief for loan interest against the rents.'

But by doing so you would actually be making "Drawings" from the business, so whilst you could offset the mortgage interest you'd have to pay income tax and NI on it as income, which would more than negate any savings offset in interest.

silvercar

Alan_M wrote:

But by doing so you would actually be making "Drawings" from the business, so whilst you could offset the mortgage interest you'd have to pay income tax and NI on it as income, which would more than negate any savings offset in interest.

You wouldn't be making drawings, you would be repaying the loans that the business took from you to buy the property in the first place.

silvercar

same thing 3 ways:

1. In order to buy a property to let out, I get a mortgage on it. The mortgage interest on this property is allowable for tax.

2. same property but I can get a better mortgage deal if I secure the mortgage on my residential home. The purpose of the loan is to fund the letting business. The mortgage interest is allowable for tax.

3. I happen to own the property that I am now going to let out. I obtain a mortgage on it (or a loan). The purpose of the loan is to fund the letting business. The mortgage interest is allowable for tax. I can do what I like with this loan money, as it is reimbursing me for the money I have put in the business.

Innys

I think the bottom line is what you are comfortable with.

If I was subject to an IR audit, I would be happy to explain to them what the mortgages on each of my preoprties related to. I could also prove it to.

I'm sure there are many landlords who borrow against their rented properties and use the funds for purposes other than business ones. I, personally, would not relish having to explain that to the IR, but I'm sure others don't feel that way.

Remember if you transgress the rules though, "ignorance is no excuse", in the eyes of the IR.