Existing property as guarantor

holly_hobby

I;m not sure if you have this the right way round.

Here we have an existing unencumbered property, which is to remain unencumbered and to be transferred from principle residence to commercial status (i.e let) - and thereby classed for HMRC as a business for annual assesment (or direct deduction if rental income is below £2400 pa and the beneficial owners are PAYE).

The OP is then to subsequently purchase, a replacement private principle residence with a residential mortgage to act as their private abode - which is not to be let and therefore is not classed as forming part of the business.

Could you therefore explain for clarity, how the new residential mortgage (mge interest) of the OP, which we know will have no financial relationship or connection with the business (at the current state of play), may be a permitted business deduction in accordance with HMRC regs.

Infact, the attached HMRC worksheet SA105 - gives clear guidance on permitted deductions/reliefs/capital allowances and balancing charges in relation to property. And whilst cleary notes that loan interest associated with the business (which may be 1 or more let properties) is permitted - it makes no mention that a permitted deduction is the loan interest on a property not associated with the business i.e NOT let. So I would be interested to know where an alternative HMRC directive comes from - and within which SA paper it is published.

http://www.hmrc.gov.uk/worksheets/sa105-notes.pdf

Thanks

Holly

CLAPTON

the business has an asset (a house) worth 200k which was introduced when the business started

the business wants to withdraw the 200k to use for whatever purpose

the 200k is withdrawn in cash by raising a loan

the fact that the 200k withdrawn from the business is used to buy a private residence is irrelevant (it could have been use for a holiday or a fast car or whatever)

HMRC makes no requirement that the loan has to be secured on the business assset

holly_hobby

No but to be a permitted deduction it must be a cost associated with the business. (let property in this case).

The OP is NOT using the EXISTING property (business) to finance any part of the new private purchase, OR indeed using a current resi property to fund the purchase or improvement to a business asset i.e let property.

The above would be correct, as i have stated several times, in this case, IF it is used to release equity to pch the OPs new private residence (as we know he wants to do), or indeed whatever he wants to spend the monies on, cruise, gamble away, fast women, wine and song .. whatever it is spent on is irrelevant ... the effected equity release will be classed as capital withdrawal from the business(let property) for HMRC purposes.

But that is not the situation we have - the OP does not intend to mortgage the let property/withdraw capital to fund any part of his new private purchase - his new mortgage is to be secured on the new PR, therefore it is NOT part of the business, and therefore it is not an associated cost to the business, nor qualifies as a permitted deduction.

If he does use the let property to raise capital for the new PR purchase, THAT is deductable as discussed above (subject to maximums discussed in earlier posts), and lender criteria.

H

Oneday77

Guys I am delighted to see the extra info you've all supplied. I never thought any of his would be as big an issue. At least I now know what to look into.
At the end of the day we will seek advice, it may not be for a few week but we will. It is now 2012 and you can all agree to differ. I can see both sides to the argument and I could see how different accountants could 'twist' the facts to suit. My OH will ensure we go straight down the right side of the law

holly_hobby

HMRC will always be happy to give guidance, and I have provided you with SA105, which discusses various reliefs, allowances, etc (your accountant will be familiar with this).

Moving away, best of luck with your purchase (Abbey & Nationwide will add your rental inc to salary - which was your actual q way back when !), and you know that if you want to look at buying your new house as tax efficiently as possible, how it may be achieved.

Happy 2012 to you too, and all the contributors to this thread .... hope its good for all !

H x

jamesd

holly hobby, you're not under the impression that the business is only able to deduct interest on a loan secured on the property the business operates are you? If so, you're simply wrong, such a loan can be secured with any property.

Thrugelmir

jamesd wrote: »

holly hobby, you're not under the impression that the business is only able to deduct interest on a loan secured on the property the business operates are you? If so, you're simply wrong, such a loan can be secured with any property.

The new loan is being used to acquire a primary residence. So the interest expense is not wholly and exclusively for the purposes of the rental business

holly_hobby

jamesd wrote: »

holly hobby, you're not under the impression that the business is only able to deduct interest on a loan secured on the property the business operates are you? If so, you're simply wrong, such a loan can be secured with any property.

If you read and understand my posts - you will see that is not what I said.

The loan related to a business may be on the asset itself (in this case the unencumbered property), or on another - BUT - the finance must be connected to the business and a clear related business cost to be a permitted deduction.

In this case the business (property to be let) is clearly not funding anything.

Accordingly IN THIS CASE, for the new mortgage interest to be tax deductable - the OP would need to involve the business (let property) to make the loan a business expense i.e. by using an equity release mortgage or loan, to either wholly or partly fund their primary residence purchase. This loan would be a clear business expense (classed as capital withdrawal) and fully deductable (up to maximums as prev discussed).

Further to which, and in general, if an individual was injecting capital into the business, they may seek finance either secured on another asset/property, or by unsecured borrowing - but there must be a clear audit trail demonstrarting that the same capital went into the business - as that would demonstrate it is a business related expense (loan) and again make it a permitted deduction.

For example (and keeping it property related) - where an individual uses equity release on their residential property, to either partly or wholly fund the purchase of a property to let - that transaction is a clearly related business expense (the mortgage/loan being used to purchase or inject capital into a business asset). And as such is clearly eligible to be offset against the gross rental income on the let property (even where there is no mortgage on the let property) for income tax purposes.

BUT there must be a connection and clear audit trail between the 2, to lawfully offset incurred loan costs as a business expense.

What we are talking about in this case, is the OP purchasing a property , which is neither being funded (wholly or partly) by the existing let property (business) via capital withdrawal (equity release) - so is not a business expense, nor will it have any relationship to the business (as it is not to be let, but to be the OPs primary residence) - which also means that any mortgage secured on the new property is not a related business expense, but clearly a personal expense, and thereby not a lawfully permitted deduction.

Should of course, this primary residence subsequently also be let at a later stage, then it too becomes part of the business, and accordingly the interest element of the mortgage on the property at that point will be classed as a related business expense, and duly becomes a permittable deduction against rental income. (as would any further equity subsequently released from the property, subject to maximums as discussed previously).

I can't be any clearer with this ...

Please read my posts carefully - and you will see that what constitues a permitted business expense is fully discussed.

Holly

jamesd

Thrugelmir wrote: »

The new loan is being used to acquire a primary residence. So the interest expense is not wholly and exclusively for the purposes of the rental business

The loan is being used to withdraw equity from the letting business at the time the let property is being transferred to the letting business.

It still needs to be done properly to avoid the risk that Holly is discussing, something that must be discussed with an accountant experienced in this area. It's entirely doable, provided it is done properly. Get it wrong and it won't be deductible.

holly_hobby

jamesd wrote: »

The loan is being used to withdraw equity from the letting business at the time the let property is being transferred to the letting business.

But the let property is not having any equity (capital) withdrawn to fund the purchase (albeit the OP will be using the rental income withe their earned income for affordability purposes)........

The proposed mortgage is to be secured upon, and used to fund the purchase of the OPs new primary residence, it therefore obviously has NO connection to the business (either by way of security or its funding), and therefore is clearly NOT classed as a related business expense (unless it too enters the letting market when this will obviously change in accordance) ...

H