How to reduce tax on rental income

jamesd

MarkyMarkD wrote: »

If the homeowner and the letting business were separate entities in the way you describe, the homeowner would have a taxable income of the interest, which wouldn't be offsettable against the mortgage interest.

I described it as I do because that split of business and owner is the reason why the interest is allowable as an expense and that's how they are split in the tax rules. If it was just the individual it wouldn't be, because interest paid on loans by individuals is not tax deductible. Interest paid by a business is. The homeowner doesn't have the interest as a taxable income because it's never an income for the home owner.

So:

Homeowner pays non-deductible interest on their mortgage.

Business receives rental income and pays interest on the money it borrowed from the homeowner. The interest is an allowable business expense and is deducted from rental income along with other expenses.

Business has a profit or loss. If it has a profit it can pay some of that to the owner(s) of the business as their taxable income. If it has a loss, it can carry that forward to later years to offset against profit in them.

Anon, yes, it's an allowable expense for the business. If the mortgage is 100k and 50k is lent to the business, half of it is for the business and is deductible against business income, the other half is just the homeowner's mortgage cost.

somekindofwizard

I hope I'm not hijacking this thread, but I have a query which seems very similar to those already discussed (especially the case of alm721, all the way back in post #17!), but not identical, so I wanted to run it past some of the experts here.

The scenario:
I own my own home, mortgage free, in my own name. I want to take out a mortgage on it to buy a BTL property.

The mortgage I take out will have to be in the joint names of me and my girlfriend (we're not married), as the lender needs to take her income into account because I've only been self-employed for 6 months. So I believe that I'll need to add her name to the deeds of my home - not a problem.

I'm registered as a sole trader, my girlfriend is PAYE. Both basic rate taxpayers.

The questions:

1. Can I offset the mortgage interest against rental income? A friend told me I wouldn't be able to, but posts here seem to suggest you can as long as the mortgage was taken out SPECIFICALLY to buy a rental property. Which it will be.

2. If the mortgage is in joint names and so is the BTL property, whose accounts will everything go on? Will we have to split it 50/50 and she'll have to start self-assessing? If so, what then happens if we get married in a few years?

I really appreciate everyone taking the time to share their expertise here, so thank you in advance for any replies. I know I should get formal advice before proceeding, but wanted to get an idea of what you chaps and chapesses think first!

MarkyMarkD

jamesd wrote: »

I described it as I do because that split of business and owner is the reason why the interest is allowable as an expense and that's how they are split in the tax rules. If it was just the individual it wouldn't be, because interest paid on loans by individuals is not tax deductible. Interest paid by a business is. The homeowner doesn't have the interest as a taxable income because it's never an income for the home owner.

So:

Homeowner pays non-deductible interest on their mortgage.

Business receives rental income and pays interest on the money it borrowed from the homeowner. The interest is an allowable business expense and is deducted from rental income along with other expenses.

Business has a profit or loss. If it has a profit it can pay some of that to the owner(s) of the business as their taxable income. If it has a loss, it can carry that forward to later years to offset against profit in them.

Anon, yes, it's an allowable expense for the business. If the mortgage is 100k and 50k is lent to the business, half of it is for the business and is deductible against business income, the other half is just the homeowner's mortgage cost.

What you are saying does not make sense. You claim that the business pays interest to the homeowner, but then state that the homeowner doesn't have the interest as an income. But the homeowner WOULD have taxable interest income, if it worked the way you describe.

And the business cannot pay "some" of the profit to the owner as their taxable income. All of it is by definition the owner's taxable income, because the business IS the owner.

Far easier to say, as I do, that the mortgage is 50% the homeowner's and 50% the rental business's.

jamesd

MarkyMarkD wrote: »

What you are saying does not make sense. You claim that the business pays interest to the homeowner, but then state that the homeowner doesn't have the interest as an income. But the homeowner WOULD have taxable interest income, if it worked the way you describe.

What I've been doing is explaining the distinction between the business and the owner of the business that HMRC uses to justify the interest being deductible. Somewhere in its voluminous manuals HMRC goes to the trouble of giving this reasoning.

If you find it easier to understand it differently from the business and individual split that HMRC uses, that's fine. It only made sense to me once I saw HMRC's business and individual split reasoning.

jamesd

somekindofwizard wrote: »

1. Can I offset the mortgage interest against rental income? A friend told me I wouldn't be able to, but posts here seem to suggest you can as long as the mortgage was taken out SPECIFICALLY to buy a rental property. Which it will be.

It doesn't matter whether it's taken out specifically to buy a rental property. You can take half of it for a world cruise and half to transfer to the rental business to buy the property and the half going to the rental business will have fully deductible interest.

somekindofwizard wrote: »

2. If the mortgage is in joint names and so is the BTL property, whose accounts will everything go on? Will we have to split it 50/50 and she'll have to start self-assessing? If so, what then happens if we get married in a few years?

I don't see a way to avoid SA for her. Maybe someone else knows of one. What would you want to change when married?

Be sure that you area aware of the ownership effects on your home of adding her.

Anon

jamesd wrote: »

I don't see a way to avoid SA for her. Maybe someone else knows of one. What would you want to change when married?

In my view (but what do I know, I have been the one asking all the questions ), in this scenario yes it is 50/50 and she would have to self-assess, as you say the property is in joint names (which you say it will have to be as you need her income to secure the mortgage). However, I seem to recall reading somewhere that although HMRC assume a 50/50 split, you can change that so that the beneficial interest in the property (and the income) is weighted to one partner or the other (though not sure if this only relates to married couples/civil partners).

That said, if you were securing all the finance against your existing property in both names, the cash released could be used for any purpose you want as discussed in this thread and therefore you could choose to buy the BTL in one name only (best to check though, as again could be different if not married and not sure if one partner giving another unmaried partner a pile of cash would be seen as a taxable gift?).

Anon

Fuzz_006

Hi Everyone,

I would like to re open this thread.

I couldn't sell my flat. (No mortgage on this). I therefore rented it out and got a mortgage to buy my current home. From my research on the net it appears I CAN use mortgage interest on current home to reduce the tax on rental income.

BM45700

I have spoken to two accountants who have both told me I can't.

1. Has anyone actually managed to do this?

2. Can anyone direct me to an accountant who can help me with this.

Thank you.

jamesd

You can't directly use mortgage interest on your current home.

You can take out a mortgage or extra advance on your own home and then lend that money to your BTL business and have your BTL business pay you the mortgage interest rate on the money you have lent to the business.

There's no difference in how it ends up working but the loan to the business is what the interest can be paid on and deducted from income.

See the example at BIM45685 for a business being lent money that was obtained via a loan on the business owner's home:

"Mr Y has been driving an HGV for several years. He gets the opportunity to buy a nearly new vehicle for £25,000 if he can put down a deposit of £5,000. His home mortgage building society lets him borrow that money as he has equity of £20,000 in his house. The loan is secured on his house. This does not prevent the interest on the loan of £5,000 being accepted as incurred wholly and exclusively for business purposes, since the loan has been used to fund the acquisition of a business asset. The security is not relevant."

amduser

I love this thread, and I am in the exactly same situation as #87, any definite answer to those questions?

polzovatel

Hi,

We bought a new,bigger, house as we could not sell the old one for 5 years
and want to rent the old house out.
Could I claim interest for the mortgage which I took for the new house?
Thanks