BTL Allowable Expense Question

chrisfi

I’ve been doing a lot of research in buy-to-let and having searched this forum, I have found the answer to one of my questions - it is OK to remortgage my main property to finance a buy-to-let and the interest on that loan is an allowable expense that could be deducted from the rental income. See - Avoiding buy-to-let mortgage by remortgaging own home (I can’t post links…..)

However, what proof would the Inland Revenue require that the loan was specifically for this purpose? Let me clarify – if you have a mortgage for say £50,000 and have sufficient equity to increase this by a further £100,000 to buy a property to let, how would you go about proving the £100,000 part of loan was to finance the buy-to-let from what is ultimately a single £150,000 loan against your main property?

And this leads on to an interesting thought which has just occurred to me now…

Keeping the same example as above, but also suppose I have £40,000 in savings which are returning a higher rate of interest than that I’m incurring on my mortgage (which is true – mortgage at 1.59%, ISA savings at 3%), you could say my savings are offsetting my mortgage. If I were to combine my £40,000 savings with the £100,000 increase in mortgage to buy a property, could I claim as an allowable expense the interest (at 1.59%) on the entire £140,000?

Following on from that…. If not, could I get around this by paying off £40,000 of my mortgage, then at a later date borrow the £140,000 to buy the property to let? If so, how long would I need to wait between paying off and reborrowing? I must say this does seem a bit daft, but might work!

Thanks.

00ec25

the audit trail required by HMRC is simply evidence of the size and %rate of borrowing (mortgage documents), the bank statement showing receipt of 100K, the bank statement showing payment of 100K for the BTL purchase along with the paperwork confirming BTL purchase and price. The flow of the money is the evidence

as for your thoughts...
thought 1
not allowed - it is simply you taking one form of existing personal wealth (cash) and converting it into another form of wealth (property investment). There is no tax offset available for that

thought 2
in principle that is allowed, you would be genuinely borrowing 140K for the purpose of the BTL, the timing is irrelevant - but what is the point??
you currently get 3% tax free on 40K... £1,200 pa
if you do it then you would claim an extra cost of 40k x 1.59% = £636 pa against your rental profit. Even if you were higher rate tax payer then effectively you will "save" tax on £636 off your bottom line profit, so at best 636 x 40% = £254 ... so you would be £946 pa worse off than keeping 40k in an ISA

of course interest rates will change so it might be mathematically viable in a few years time...

chrisfi

Thanks. The audit trail required by HMRC seems simple enough.

With ref to using my £40K, if I’m entirely honest, I would like to combine my savings with the loan to buy the type of property I’m interested in. So if I can save a bit of tax, thought 2 may be worth considering.

And don’t forget that you need to include the rental yield in the calculations. Based on the type of property and location I’m looking at this would be around 3% after deductions and tax @40%. So there would be a small advantage if I were to follow thought 2 ie approx £254.

Also, there’s the gain in capital to consider which I suspect would be a loss for the next couple of years, but I’m not looking at proceeding right now, just weighing up options so I’m ready to proceed when the time is right.

chrisfi

00ec25 wrote: »

thought 1
not allowed - it is simply you taking one form of existing personal wealth (cash) and converting it into another form of wealth (property investment). There is no tax offset available for that

Hmm… having thought about this for a while I must say that I can’t think of my ISA as ‘existing personal wealth’. I have a mortgage of £50k and an ISA of £40k. Therefore I have a personal debt of £10k. I’m using part of the money from my mortgage to invest in an ISA. Could I not cash in my ISA to part fund a BTL property (i.e. transfer the borrowing) and claim the interest payable on that £40k as an allowable expense? It would be a lot simpler than transferring money in and out of my mortgage! However, that would leave me with the problem of proving this all to the tax man – a good account may be required…..