Paying off second property with remortgage and how is tax affected.

Taxbreak

First time thread so go easy on me. I have a problem which I cannot find an answer too.
I have a second property which is due for re mortgage and there is no way I want to pay the extortionate fees for another buy to let mortgage when I can only secure the deal for 2 yrs. I am considering remortgaging my residential property to release funds to pay off the rental property but am concerned with how the tax works. I know how the tax works with only paying income tax on anything earned above the interest and insurance.
My question is if I remortgage to finance the second property am I liable to have income tax imposed on all the rental earnings or can I right off the interest that I am paying on the amount that I have just obtained through the remortgage.
Any advice would be great fully received

anselld

What do you mean "due for remorgage". Why can you not continue on the lenders standard variable rate?

IFAIK you would not be able to claim tax deduction if you tax residential mortgage instead as you cannot show that the finance was for the sole and exclusive use of the rental business.

RabbitMad

Yes, you can offset the interest paid on a residential mortgage against rental income.

kingstreet

RabbitMad wrote: »

Yes, you can offset the interest paid on a residential mortgage against rental income.

Yep. Upto 100% of the value of the let property at the time it was first let.

anselld

kingstreet wrote: »

Yep. Upto 100% of the value of the let property at the time it was first let.

Is there an example or statement of this anywhere in the tax code or guidance?

Taxbreak

kingstreet wrote: »

Yep. Upto 100% of the value of the let property at the time it was first let.

Kingstreet can you just elaborate a touch further. Are you saying that if I remortgage my residential property and pay off the second property I will only pay tax on the income made from the rent minus the interest paid on the remortgage amount. Also what do you mean you can offset 100% of the interest at the time the property is first let? is that after you have paid the mortgage off and then its first let as opposed to my property which has been let some time. Is there a chapter in the tax code that you can quote to help me.

kingstreet

Have a gander in here.

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

Deductions and expenses
Rental business expenses must be incurred wholly and exclusively for business purposes and not be of a capital nature.

Difficulties may arise where the cost has a dual purpose, partly private and partly business. A deduction can only be made for the business part where a definite part or proportion satisfies the wholly and exclusively test

So, in the first place, you need to be able to demonstrate a clear trail between the mortgage on the let property and its replacement by a mortgage on your residential property. This could be achieved by a solicitor's completion statement showing the disbursement of the new funds to repay the old.

http://www.accountingweb.co.uk/anyanswers/mortgage-interest-relief-rented-property

This is a common problem and the source of much discussion in the past. Fortunately HMRC published their view about four years ago and that more or less put an end to the debate. The consensus of opinion is clear.

It doesn't matter what a loan is secured on, property, endowments etc. It's the purpose of the loan that determines the tax deductibility.

So, it's quite acceptable to claim tax relief on interest paid on a loan secured on one property used to fund the purchase of another property that's a buy-to-let. The first property might be another buy-to-let or just the borrowers private residence. Either way the interest is primarily a deduction against rental income from the second property.

In your client's case the mortgage on the new private residence is clearly for buying that property. So, no tax relief on the interest can be claimed. But as Tax Angel and Penny say a re-finance would allow your client to obtain tax relief if organised in the way they suggest. As a variation on this, I would go one stage further and suggest something that would preserve the lower rate of interest obtained by using a residential mortgage rather than one for a buy-to-let property.

A re-mortgage on the new private residence could be arranged on the basis that the loan (or part of it , depending on the property values and level of borrowing) is not for repaying the existing mortgage but to release equity from the buy-to-let. It will merely be secured on the new home. The loan interest would be tax allowable as the release of equity from a property rental business is a qualifying purpose. This suggestion might raise a few eyebrows but ought not to If one follows the logic behind it.

Key points:

- the purpose of a loan determines whether tax relief on interest is available
- the asset a loan is secured on is irrelevent for income tax relief
- equity release from a property rental business is a qualifying business purpose for
loan interest relief

http://www.hmrc.gov.uk/manuals/pimmanual/PIM2105.htm

http://www.hmrc.gov.uk/manuals/bimmanual/BIM45690.htm

I suggest using an accountant to establish exactly what can be done as this is a subject where little clarity appears forthcoming on the HMRC sites, as you can see...

A search on here will throw up a lot of threads on the subject.

anselld

Thanks Kingstreet.

I knew it could be done at startup, ie take out residential mortgage on Property A to fund BTL businesss property B. However it is the first time I have seen it proposed for refinancing a BTL business which is already adequately funded.