Reserve Mortgage to Fund Let - Tax Issue

Freightdog

I have just bought an apartment using cash and part of the reserve mortgage on my main home. My question is: can the extra interest payable on my reserve mortgage be used against tax in the way that interest from a buy-to-let mortgage can? If so, could I move some of my reserve mortgage to savings until the amount of reserve equals the value of the apartment so that I can minimise my tax burden?

Any help with this would be gratefully received.

G_M

Not sure what you mean by 'reserve mortgage'. You mean you are increasing the amount of borrowing on your existing residential mortgage?

In principle yes, but you have to convince HMRC that the mortgage on which you are claiming relief was used to fund the purchase. With a BTL mortgage this is straight forward. Using a mortgage on a residential property it is a harder task.

As for moving mortgage to savings, I fail to see how this helps with tax. Savings are not tax-deductable! But again, maybe I've misunderstood.

Freightdog

Hi, thanks for the reply and sorry if I was vague. To be specific I have paid off about £120,000 of my main mortgage. If I wish I can draw against this to raise the level of mortgage to the maximum of £300,000 which was my original mortgage. Of course I have to pay interest on any drawdown of my reserve mortgage - in this case 5%. Since I have used about £30,000 of my reserve mortgage to buy a property to let, I will pay around £1500 extra in interest. My rental income should be around £4000 per annum so the profit would be £2500. Is the tax payable in this case on the £2500 or the full amount £4000? By reducing my tax burden what I meant was if I transfer another £60,000 say to savings so that the mortgage interest is now on £90,000 (the value of the property I intend to let) - ie, £4500 interest, would I now have no tax liability since there is now no profit (£4000 - £4500 = loss)?

Hope that makes sense

G_M

It should be fairly simple to show HMRC that
1) on xx date you drew down £30,000 on your existing mortgage and
2) on or shortly after same date you purchased the 2nd property

You can then offset the £30K against rent.

If some months/years later you draw down more from your residential mortgage (an place it in a savings account!) you will have a hard task convincing HMRC it was used to fund the rental property!

Your rental income is £4K a year. From this you can deduct various allowances (see here). ONE of these is the interest payments you make on the £30K (but not any repayments you make on the capital borrowed).

Hope that helps.

Freightdog

Yeah, I suspected that my little scheme to save tax might prove difficult to accomplish, but I really appreciate the reply.

All the best for 2012, Mike