Equity out of btl

molit

Hi,

I've had one of my BTLs (well its currently consent to let) on a repayment mortgage. My understanding is i can recover the captial repayments since I started renting it out with no tax impact. is this correct? (I appreciate i will have to change lender and am in the process of doing so) The stuff I've read appears a bit convoluted, and contradictory. I should add this is not to buy another property to rent out, or for any other business development stuff, its to spend on my primary residence.

Cheers

M

Murdina

Not entirely sure what you mean?
You cannot get a deduction for income tax purposes against rents for capital element of repayment mortgage.
Mortgage has no relevance when it comes to paying capital gains tax when you sell the property.
You may be thinking of gearing up i.e. you borrow against the equity in the property, withdraw that and carry on getting a tax deduction for your interest payments. But only on interest not capital and you do need to take some care here to be sure what you are doing.
http://www.hmrc.gov.uk/manuals/bimmanual/BIM45700.htm
is usually quoted as being where to look if you want to understand how this works in terms of getting interest deduction against tax.
Or you may be talking about something completely different!

molit

cheers for the reply, just re read the main message and perhaps i can explain it better with an example.

house is worth £100000, and was worth the same 5 years ago for arguments sake
mortgage was £75k, and on repayment
After renting out for the 5 years, the mortgage is now £65k. (in the 5 years the interest on the mortgage has been offset against rental income)

If i now increase the mortgage back to 75k, to release 10k for DIY on my main residence, can i offset 75k of interest payments, or 65k of interest payments on the rental property . The link seems to indicate the 75k, but i am still not sure

ceeforcat

The 10K advance, therefore, has nothing to do with the BTL property. You can now claim 65/75 of the mortgage interest.


Edit - Incorrect - I had misread the original mortgage at £65K

jamesd

Yes, you can withdraw equity from a BTL property business and use it for any purpose you wish. The BTL business can borrow money in the form of an increased mortgage to allow you to withdraw the money. The interest on this drawing remains deductible from rental income before tax. As usual this is limited to the capital value of the property at the time it was transferred into the letting business, £100,000 in your example.

For a HMRC example see BIM45700 - Specific deductions - interest: Withdrawal of capital from a business:

In the case at hand, you're just withdrawing some of the equity that you put into the business.

You may also find the Martin & Co and accountingweb discussion of interest.

It's also not necessary to secure the mortgage on the BTL property. You could refinance the BTL mortgage and replace it with one on your own property if that's cheaper. That may allow you to take out the whole £35,000 of initial equity and capital repayment equity that you have put into the business, since it may not be 100% of your own residential property.

Don't be surprised if you get differing answers about this question, even with a specific HMRC example of equity being withdrawn from the business. There's enough ambiguity in the example to allow room for disagreement.

You should get the opinion of your own accountant, since it is that person who will need to be comfortable with what you are doing and who can advise you based on your specific circumstances.

real1314

ceeforcat wrote: »

The 10K advance, therefore, has nothing to do with the BTL property. You can now claim 65/75 of the mortgage interest.

No, they can claim 75/75.

The capital payments to the mortgage account were equity injections into the business. The equity can be withdrawn at any time. The requirement for the business to take on extra loans and paying interest is fully tax deductible. :cool:

ceeforcat

real1314 wrote: »

No, they can claim 75/75.

The capital payments to the mortgage account were equity injections into the business. The equity can be withdrawn at any time. The requirement for the business to take on extra loans and paying interest is fully tax deductible. :cool:

Yes - I have amended my post having misread the original mortgage at £65k.

molit

thanks all for your input

real1314

ceeforcat wrote: »

Yes - I have amended my post having misread the original mortgage at £65k.

It doesn't really matter what the original mortgage was it's the original price/value that matters- they would just be withdrawing the cash equity they had in the business and replacing it with financed funds.
If it was originally bought ofr £100k, they could claim for interest on £100k. :cool:

holly_hobby

real1314 wrote: »

It doesn't really matter what the original mortgage was it's the original price/value that matters- they would just be withdrawing the cash equity they had in the business and replacing it with financed funds.
If it was originally bought ofr £100k, they could claim for interest on £100k. :cool:

This is completely correct .... mge interest is a permitted tax deduction upto the value of the property (ie 100k in this case), when it was purchased or entered commercial let (ie where it was a private residence before). This is because it is classed as capital withdrawal.

Now, if the property has gained sufficiently in value, they can of course release in excess of the original value (in this case 100k), with the salient point being that anything released in excess of the original value upon entry into let, is not a permitted deduction.

Simple really ....

Hope this helps

Holly