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

Thrugelmir

scarletjim wrote: »

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...)

Book 30 minutes with a local accountant. To least ensure that you claim all available reliefs.

The tax rules have been in place for many years.

You've made the fatal mistake of taking advice after completing the transaction. Once done. There's no way of reversing it.

scarletjim

Thanks, I will do that, but your final part isn't quite true - when I moved house in November, I had the option to sell the flat, or rent it out to a couple of friends (one of whom is a close friend who I would like to see more 'settled' than she has been previously). I still have that option, I can still sell the flat if it proves too unprofitable, and my friends have known and accepted that all along.

It's just frustrating that if I sold my flat now for the £125k that it's worth, used that £125k to pay off some of my new house mortgage, then bought the flat next door to mine for £125k via a mortgage, then I'd be perfectly allowed to claim the mortgage interest as an expense. Yet this is basically the same thing, I would owe the £125k again (just on the flat not the house) and would be renting out a flat again, for all intents and purposes it's the same!

anselld

somethingcorporate wrote: »

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

antrobus wrote: »

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.

The property existed, but the rental business did not (until the flat was first let).
What I meant was that the OP had the choice to sell the flat and borrow amount X to buy the new residence. Instead the OP borrowed X+Y in order to retain the flat and create the rental business by letting it out.
Hence the rental business could not exist without amount Y of the new mortgage because the flat would have been sold.

scarletjim

anselld wrote: »

The property existed, but the rental business did not (until the flat was first let).
What I meant was that the OP had the choice to sell the flat and borrow amount X to buy the new residence. Instead the OP borrowed X+Y in order to retain the flat and create the rental business by letting it out.
Hence the rental business could not exist without amount Y of the new mortgage because the flat would have been sold.

That is exactly how I see it - but perhaps not how the HMRC will see it judging by that quote in my OP from PIM2105 (despite agreeing in principle by phone a couple of months ago...). I'll ring them again this Friday and let you all know what they say.

00ec25

scarletjim wrote: »

That is exactly how I see it - but perhaps not how the HMRC will see it judging by that quote in my OP from PIM2105 (despite agreeing in principle by phone a couple of months ago...). I'll ring them again this Friday and let you all know what they say.

I understand your frustration but the way HMRC see it (and legislation is written) is that you have have:

1) a rental business which is debt free (you as business owner chose to leave the equity in the property hence the business has no debt)

2) a personal residential property which is loaded with debt because, in your current case, that money is spent purely personal expenditure (buying your home) not business expenditure (paying for a BTL)

thus there is no link to the business so no basis on which to claim for the interest on the personal debt. To make such a link you would have to create debt directly linked to the business , ie withdraw capital from it by means of a loan in the name of the business, but would have to do so only at the time the rental business was first set up , it cannot be done later (see #28 below)

as i said less clearly in my earlier post the equity in the rental business is an opportunity cost, ie. a result of your choice. As such it is not a "real" actual cash cost and therefore you cannot claim it

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?

yes - its too late as you have seen yourself from reading PIM2105


"the interest on a loan or overdraft may not be allowable, or only part may be allowable, where the taxpayer, for example, uses the borrowing:

• to buy non-rental business investments (which may be shown in the balance sheet as assets),
• to buy private assets or assets for their family"

If you borrow now then you are saddling the business with a debt which relates wholly to a private purpose, the purchase of a family asset aka the family home. That debt therefore fails the "wholly and exclusive" test applied to whether an expenses (the interest on the loan) is business related

InMyDreams

00ec25 wrote: »

To make such a link you would have to create debt directly linked to the business , ie withdraw capital from it by means of a loan in the name of the business

So if the loan was in the name of the business, would you then be able to spend it on yourself and still be able to claim it as an business expense? Ie paying off your personal mortgage? Wouldn't that be seen as a bit contrived?

What I mean is, if it's OK to draw capital from your personal mortgage to directly fund a BTL property, and that would be considered OK for HMRC to then be tax deductible as it would be directly for business purposes, why would they not see drawing capital from business mortgage to pay for personal assets as a personal expense in which case it wouldn't be tax deductible.

Otherwise all you do is once you've created the debt on a BTL mortgage on the rental, is pay it back off using the residential, showing clear evidence that that draw down on the residential mortgage was to pay off the BTL one.

Confused!

Edited to add: I know it doesn't really matter what my layman's take on it is... what you really need is proper professional advice, but there does seem to be a difference between borrowing extra on a pre-owned personal asset to fund a new business venture. What you are trying to do is set up both business and aquire new personal asset at the same time. I guess had the business effectively bought the old property off you at start-up that would have arguably been different, as the property would actually have been sold (by you) and bought (by your BTL business) but I don't see how you could do this retrospectively if there was no sale.

00ec25

InMyDreams wrote: »

Confused!

Thanks, you are quite right to be confused as i should not post before I have woken up, have now edited #26

if you borrow against the BTL now, then it is too late if that money is spent on a non rental business purpose, ie reducing the mortgage on the family's private "asset" (ie home), as clearly shown in PIM2105

"the interest on a loan or overdraft may not be allowable where the taxpayer, for example, uses the borrowing:

• to buy non-rental business investments (which may be shown in the balance sheet as assets),
• to buy private assets or assets for their family, "

scarletjim

Sounds like the legislation is overwhelmingly against me here, so I'll probably just take it on the chin.

Thanks for everyone's input here though, lots of really helpful (plus some inquisitive) posts, all of which must have taken considerable thought and effort. I know I've said it before, but what an awesome place for this type of thing MSE is.