Buy new house and rent out my flat - is mortgage interest allowable?

scarletjim

I've just bought a new house, and am renting out my flat, which I own outright (well,about £500 mortgage left). My mortgage on my new house is about 150% of the value of my flat. Can I claim the proportion of the interest as an allowable expense for renting?

18 months ago on here someone asked if they could get a mortgage on the property that they live in, and use the money to buy a BTL, then rent the BTL out and claim the mortgage interest as an allowable expense, even though the mortgage is not on the rented out property. The post below, and several others I have found by Googling, confirm that this is ok:

m_13 wrote: »

Absolutely. A mortgage can be secured on any property so long as there is a clear link between the loan and the purchase of the BTL. We have a small mortgage on our own home which paid for a BTL flat. We have no mortgage on the BTL flat.

You can also only have the mortgage for the value of the property when you first bring it into the rental business so you can't buy a BTL property for £100k, get a mortgage for £150k on your own property and claim all of the mortgage interest

If you have an interest only mortgage on your home then all of the monthly payment will be tax deductible. However, you would need to be certain that the value of the BTL property would pay off the debt at some point.

We have insurances on the mortgage (life, sickness etc) which is a tax deductible expense on the rental business as 100% of the mortgage is linked to the BTL flat.

The difference between this and my situation though is that I'm not buying the flat now, I bought it 13 years ago, but I am still using the mortgage on my new house to 'buy' it in way i.e. if I wasn't renting the flat out, I wouldn't be able to afford my mortgage on my new place, so I'd have to sell the flat to pay that amount of my new mortgage.

If this isn't allowed, would it be allowed if I sold the flat, paid off a big chunk of my new house mortgage, then reversed that, i.e. extended my new house mortgage for the value of the flat, and used the cash to buy the flat back, putting me in the same situation as in the quote above. If so, that would be a ridiculous situation. The key is supposed to be whether or not the mortgage (and amount) is exclusively for buying the rental property - I would say it is, because if I didnt rent out the flat, I would have to sell it - I can only afford the mortgage because I'm renting out the flat. Also, the beginning of the mortage matches the beginning of the flat rental, so there is clearly some kind of link.

Any advice gratefully received.

kingstreet

If you have recently purchased the house and recently started letting the original property, you can offset interest on a mortgage upto the value of the flat at the point you started to let it, regardless of what it is secured on.

Check with HMRC that the relationship between the let property and the mortgage is strong enough before you attempt to do it. I've heard people talk about a clear audit trail but never really got to the bottom of exactly what that is.

scarletjim

That's brilliant thanks, I was gonna be skint as the rent is already cheap (doing a favour for a friend who has never really had a place to call home, she works really hard but doesn't earn much...) so this would really help.

So who do I ask about the details, is it safe just to go straight to HMRC, if so will they provide an answer in writing, and will their advice protect me if they 'change their mind' later?

To begin the conversation with them, do you have any idea what area of their website mentions what you have said?

With regard to the proportion that can be 'allowed', who decides the value of the property I'm now renting out? I bought it 13 years ago, but the value is obviously different now. What about if I take the average selling price over the last 12 months of any other flats that have sold in my block? Or average asking price of the few that are for sale at present? How else would I do it?

Can anyone recommend any websites I can read that discuss this subtle point?

kingstreet

You won't get HMRC to give you a written opinion on which you can rely and point to in a future audit. You need to take professional advice if you want that kind of assurance.

http://www.hmrc.gov.uk/agents/toolkits/property-rental.pdf

You need a written valuation of the property. Phone around a few local chartered surveyors. They'll probably do you a one-liner for £100.