Existing property as guarantor

Wh05apk

Thrugelmir wrote: »

The interest on the new property mortgage would not be offsetable against rental income as Holly says. In this case the existing property would need to be remortgaged to make it qualify.

Sorry, the interest on the new property upto the value of the rental property at outset would be treated as repayment of capital therefore it would offsettable.

holly_hobby

No thats still not correct Wh0 - the OPs purely residential mortgage is not a permittable business deduction against gross rental income on a let property, as it is classed as a personal expense.

I am also unclear on your statement where you say the "OP is placing £205k worth of property into their "business", so the "business" owes them £205k, they are simply withdrawing this capital from the business, where the mortgage is secured is largely irrelevant".

Or indeed how "the interest on the new property upto the value of the rental property at outset would be treated as repayment of capital therefore it would offsettable" - if there is no relationship between the 2 - it simply is not permissible under current HMRC regs.

Having already discussed captial withdrawal from a business in my prior post - that is in relation to equity release on an already let property.

If the OP is not releasing equity ( which would be classed by HMRC as capital withdrawal), via securing a mortgage on the let unit, for the purpose to purchase their residential unit (which appears to be the case), can you explain your thought process on how you perceive them to be linked for HMRC purposes ?

Or, indeed how the securing of a residential morgage on a residential property, wholly independant of the commercial property, can be classed as a "withdrawal of business capital" for tax, or any other, purposes?.


To be clear .. the only part of a residential mge that may be offset against rental income dervied from a seperate rental unit for inc tax purposes, is that element used to either initially purchase OR provide further/additional investment into the property (aka business) .

An example of what your current example is saying, is rather the same as myself trying to offset my own private residential mortgage interest against my gross income for tax purposes. Unless my property is a business asset (or has been used to provide a capital injection into the business via secured/evidenced finance) it is not a permittable deduction, as my private residence is classed as a personal expense, and therefore effecitvely has no relationship with my business. (notwithstanding the permitted deductions for using a private residence as a business location/office - which are not relevant in this thread).

In respect of the scenerio we have, of the OP wishing to acquire a residential mortgage, using rental income from their let property to enhance their affrordabilty - that has been answered. You suggested Abbey - whilst I know Nationwide will also consider if the let property is unencumbered.

However, the initial advice in respect of offsetting interest from that mortgage, against gross rental income from the let property, for tax purposes is where the confusion has arisen.

To be in a position to deduct mortgage interest from gross rental income, the OP would need to release equity from the let property to purchase their new one (wholly or partly), with the amount of equity that may be released for qualifying offsetting purposes, restricted to 100% of the purchase price (if originally purchased as a commerical property), OR 100% of the value of the property when it became a commerical asset (i.e commenced being let). The OP may raise more than this, subject to circs and status, but the element over the pivotal sum as noted above, is simply not eligible to be used for tax relief in the context of this thread.

However, you are quite right in echoing my statement, that tax advice recd on an open forum must ALWAYS be independently verified by a known qualified tax professional or HMRC directly. And that the OP should ensure the validity and providence of the information provided from contributing parties, to ensure that they don't suffer financially and the wrath of HMRC for relying on inaccurate data.

Holly

Wh05apk

Ok fine, it's new years eve and I can't be bothered to argue, I am only going off what my clients have done following advice from their accountants.

Happy new year all.

BoGoF

I'm with the others on this one. By 'accountant' did they mean a bloke down the pub?

holly_hobby

Well its not an argument by any means - however you did make a point of stating that the info I had given was competely inaccurate - so its more a correction of facts than anything else, which I'm sure you'll allow me and is after all for the OPs benefit ....


Anyway back to the OP, whose thread this is .... Abbey & Nationwide will take account of rental income & your earned income for your new residential mortgage (Nwide if the property remains unencumbered), if you do wish to try and offset mortgage interest against rental income for tax purpsoes, you now know the correct way to achieve this.

Good luck and again ... Happy New Year to all - hope its a safe and good one for everyone !

Holly x

Meeper

Wh05apk is quite correct in this case.

If you have a residential property which you then intend to let out and it has no mortgage, you are starting a business venture with said property. On the day that happens, the value of the property is effectively put into the business. If a mortgage is taken on a separate property which is then made residential, the interest on that property CAN be off set against the rental income from the previous property. If the individual owns a holiday home which they use in the summer, and that has a mortgage on it, the interest on that can be offset also. If the individual decides to re-mortgage and raise additional funds for a holiday to Las Vegas and a Ferrari, ALL OF THAT interest can be off set against the rental income, up to the value of the property on the day that it entered commercial use.

I know this to be the case as in the last 18 months I arranged mortgages in the millions for clients in this exact situation, and sought confirmation from HMRC about this directly. The guidance that I was given is summarised as above, and this guidance was backed up by one of my clients' accountants, PWC.

holly_hobby

The holiday home mge interest is tax deductable against rental income as a business - accordingly any equity released from the same property, is classed as a business capital withdrawal, again fully tax deductable up to the pch price or value of the property when it entered into commerical letting.

Same goes for any property (whether previous residential residence or not) when let - the interest on the mge, and/or interest on any further equity release subject to the above criteria is again fully deductable. (anything over this can not be offset against rental income).

A resi mortgage used to purchase or inject capital into the business is also tax deductable (interest), subject to the above, and where a clear audit trail can be demonstrated.

However, a resi mortgage secured on yourown primary residence is not a business expense in respect of the let property, it is a personal expense - and is therefore not a permitted deduction.

To say otherwise, would mean in essence that we could all offset our mortgage interest against our income for tax purposes ..

I am happy to be corrected by ref to the HMRC paper which publishes the ruling that you refer to, i.e citing that a residential mortgage may be offset against rental income on another property, where there is no relationship between the 2 and the resi mortgage is purely a personal expense. (ie - the res morgage was neither used to purchase or fund the commerical property).

Holly

Oneday77

Thanks for all the responses folks. It has made very interesting reading.
We will take further advice as advised.

Early Happy New Year to you all.

property.advert

Though there may be some procedure to follow, it would be nonsensical not to allow relief on mortgage interest whilst at the same time taxing the income derived from that investment.

As ever though, professional advice should be sought to clarify your particular situation.

jamesd

holly_hobby wrote: »

A resi mortgage used to purchase or inject capital into the business is also tax deductable (interest), subject to the above, and where a clear audit trail can be demonstrated.

That's what is happening with the proposed event. Instead of transferring the whole value of the current property into the business only part of the value is being transferred.

holly_hobby wrote: »

However, a resi mortgage secured on yourown primary residence is not a business expense in respect of the let property, it is a personal expense - and is therefore not a permitted deduction.

If it's not structured correctly that is indeed how HMRC would view it.

holly_hobby wrote: »

To say otherwise, would mean in essence that we could all offset our mortgage interest against our income for tax purposes ..

That's not so, for we wouldn't all have a business to lend money to.

holly_hobby wrote: »

ie - the res morgage was neither used to purchase or fund the commercial propertyp

The residential mortgage is being used to fund the property for the business acquiring it, instead of selling it to enable purchase of the new personal property.

This transaction should be done with personal advice from an accountant familiar with BTL and its tax treatment because the consequences of structuring it incorrectly are those you outline: HMRC would refuse to allow the deduction. Get it right and it will be deductible.