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

anselld

BIM45700 - proprietor may withdraw capital from the business.
BIM45685 - security for loan finance does not need to be against a business asset.

Surely then a proportion of the OP's residential loan can be shown to fund release of capital from the BTL.

Thrugelmir

scarletjim wrote: »

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.

That was your decision. There's no link between the transactions. Hence why most people reinvest equity into a new property. As often results in a lower LTV and therefore interest rate.

kingstreet

Did you seek the professional advice I recommended?

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.

and

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/toolki...rty-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.

antrobus

anselld wrote: »

BIM45700 - proprietor may withdraw capital from the business.
BIM45685 - security for loan finance does not need to be against a business asset.

Surely then a proportion of the OP's residential loan can be shown to fund release of capital from the BTL.

The problem the OP has is that there has not been any withdrawal of capital from the business.

kingstreet

This is a quote from this guide by the ICAEW;-

3.6 INTEREST AND LOANS

The principles for receiving tax relief for interest
paid on loans taken out to finance a property
income business are the same as for any other
business, see BIM45700. Note that companies
which own let property are subject to the loan
relationship rules, see section 4.3.
As long as the borrowings are used to fund the
letting business in some way it does not matter
whether the loan is short or long term, nor
how it is secured, as made clear at PIM2105.
The normal wholly and exclusively rules apply.
Where the loan has been used partly for private
purposes, the interest must be apportioned
on a just and reasonable basis. Also, as with
all business loans, it is important to check the
deduction being claimed relates only to interest
and not to repaying the loan capital.

HMRC accepts that tax relief can be given on
100% of the capital value of the property as it
stood at the time it was brought into the letting
business.

http://www.icaew.com/~/media/Files/Technical/Tax/Tax%20news/TAXline%20tax%20practice/taxline-tax-practice-27.pdf

As I said, you cannot rely on HMRC to give you an opinion on which you can rely.

anselld

antrobus wrote: »

The problem the OP has is that there has not been any withdrawal of capital from the business.

Why not?
Capital was introduced to the rental business ( the value of the flat) when it was first let.
Capital was then withdrawn by securing a loan on the residential property.
The rental business would not exist (to generate income and tax) without a proportion of the residential loan. That must surely imply that a proportion of the loan is wholy and exclusively for business use.

shamps

Hi OP,

This is a similar situation to one I now find myself in. We have an apt with a current account mortgage, we have paid off the mortgage on paper and can draw on it to fund another house purchase.

We are going to draw the maximum facility available on the APT, use that money to fund the deposit on a new house and then rent out the apartment using the rental income to pay for the interest incurred on the outstanding mortgage balance related to the apartment which is from our current account mortgage.

The mortgage on the new house would be just a simple capital repayment mortgage.

So I would rely on the basis that the interest and any associated apt costs are fully allowable against the rental income as they are all associated with the property being rented.

Similarly, as this is not a buy to let mortgage (as its a CAM) the lender does not need to change the mortgage type...

somethingcorporate

anselld wrote: »

Why not?
Capital was introduced to the rental business ( the value of the flat) when it was first let.
Capital was then withdrawn by securing a loan on the residential property.
The rental business would not exist (to generate income and tax) without a proportion of the residential loan. That must surely imply that a proportion of the loan is wholy and exclusively for business use.

The bit I have bolded does not make sense. The rental business existed (asset of the property and liability of the mortgage) before the residential loan was taken out so that implication you have made is very tenuous at best.

Had they moved into a rented property and did not have another residential loan then the business still would have existed in exactly the same state. The residential loan had absolutely nothing to do with the funding of the business.

antrobus

anselld wrote: »

Why not?
Capital was introduced to the rental business ( the value of the flat) when it was first let.

Correct.

anselld wrote: »

Capital was then withdrawn by securing a loan on the residential property.

Incorrect. The acquisition of the residential property with or without a loan has no effect on the business whatsoever.

anselld wrote: »

The rental business would not exist (to generate income and tax) without a proportion of the residential loan. That must surely imply that a proportion of the loan is wholy and exclusively for business use.

Incorrect. The rental business would exist irrespective of the existence or non existence of a separate residential mortgage. The OP could have rented a property, gone to live with his parents, moved to Alaska, any number of things.

In order to withdraw capital from the business. The OP has to withdraw capital from the business e.g.

scarletjim wrote: »

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

That would work.

scarletjim

somethingcorporate wrote: »

The rental business existed (asset of the property and liability of the mortgage) before the residential loan was taken out so that implication you have made is very tenuous at best.

Sorry if I'm being thick but I don't understand this bit. I moved house on 2nd November, my friends moved into my flat on the same date, so surely that's also when the rental business began, the same date that the residential loan began?