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

scarletjim

I originally asked this question in the thread below, and received a positive answer which several other people have agreed on other threads.

https://forums.moneysavingexpert.com/discussion/4320303=

HOWEVER I have (finally!) received a response from HMRC, in which it quotes the following from PIM2105:

"A taxpayer cannot, for example, deduct interest on a private loan, such as a loan used to buy their private residence."

Can anyone offer any further advice on this? I've rented out my flat rather than selling it purely to help out a friend, and as a result I now have a much bigger mortgage on my new house than I otherwise would have, but if I can't deduct a fair proportion of the interest on my mortgage on my new house (where I live), then this is going to leave me with a large ongoing loss when compared to just selling the flat.

somethingcorporate

If the finance on the new (private) house has nothing to do with the financing of your business asset (old house) then I don't think mortgage interest up to the full value of the rental property is allowable - only the interest actually occurred in funding it (i.e. the mortgage secured upon it).

Evidently there is no relationship between the financing of your two properties and hence HMRC have told you you cannot claim.

scarletjim

But arguably there is a clear link. When buying the new house, I could have sold the flat to reduce the mortgage on the new house, but decided instead to allow that capital to remain in the flat and become a rental business. The day I moved into my new house, my old flat started to be a rental business for example.

What if I sold the flat, paid off that amount of my mortgage on my new house, then the next day purchased the flat next door to my current one with a new mortgage? This would all be absolutely fine then I bet. Which doesn't make sense to me because it's basically the same thing.

This is a bit frustrating because everyone said it was fine a couple of months ago.

Btw HMRC haven't actually said I can't claim, they've actually just ignored my specific questions and just sent me print outs of all the relevant web-pages (despite my letter saying I've already reviewed them and they don't cover all my points adequately...)

somethingcorporate

I know what you are saying as have explored it myself and have come to the conclusion it is not worth the risk in doing what you are suggesting because I think any investigation by the taxman would fail to show the direct link.

Has you done as suggested then I agree that a sufficient trail would exist, at present I don't think it does. I would love to be proved wrong because I have plenty of equity in my rental property and a whopping personal mortgage on my current house I would love to offset but I just don't think you can do it.

scarletjim

Boo...

So out of interest, why do you have the equity in your own residence? Presumably because interest rates are much higher for BTL?

Hopefully we'll get some comments on here from those saying it was ok and indeed quite standard a few months ago, would be interesting to learn if we're missing something somehow.

Thanks for your comments anyway (even if only bad news lol)

Kynthia

A link isn't good enough. For interest on borrowing to an allowable expense, the loan funds must have been directly used in your property business.

somethingcorporate

scarletjim wrote: »

Boo...

So out of interest, why do you have the equity in your own residence? Presumably because interest rates are much higher for BTL?

Hopefully we'll get some comments on here from those saying it was ok and indeed quite standard a few months ago, would be interesting to learn if we're missing something somehow.

Thanks for your comments anyway (even if only bad news lol)

We have equity in our BTL because it was our home that we couldn't sell and had a massive ERC on the mortgage (£7k) so thought it would be easier to rent out.

Fortunately the in-laws let us borrow some for a new deposit for our current house and we can afford to keep both for now with the rental income.

I really hope someone does come along and prove me wrong.

00ec25

this situation is a bit of a mix, normally the purpose for which the borrowing is used is ignored, but in your case you are effectively trying to claim an opportunity cost ie you have not borrowed on your now BTL instead you have borrowed on your new residence and are trying to claim that by leaving equity in the BTL it is therefore an opportunity cost

won't work, the residential mortgage is not funding the business in any way and you cannot claim an opportunity cost

although I appreciate the bank would not let you, you should have taken the borrowing on the BTL and then spent that on the new residence, that is the allowable route

see example 2
http://www.hmrc.gov.uk/manuals/bimmanual/bim45700.htm

G_M

It is a confused set-up.

But basically you took out a loan.... to buy your private residence. So cannot offset that loan against rental income elsewhere without great risk of HMRC investigating and discounting.

Your flat was an exiting asset at the time you took out the loan. By renting out the flat (as opposed to selling it and reducing the size of the mortgage on your private residence) you increased your income (rent from the flat). This was unrelated to the new home you bought yourself.

But there is some ambiguity. Up to you whether you want to argue the point with HMRC!

scarletjim

00ec25 wrote: »

although I appreciate the bank would not let you, you should have taken the borrowing on the BTL and then spent that on the new residence, that is the allowable route

see example 2
http://www.hmrc.gov.uk/manuals/bimmanual/bim45700.htm

Is it too late? What if I got a BTL on the flat now, and used the money to pay off part of my new house mortgage?

somethingcorporate

scarletjim wrote: »

Is it too late? What if I got a BTL on the flat now, and used the money to pay off part of my new house mortgage?

I think that would be perfectly allowable.

The finance is then against your business asset.