Buy to let and home mortgage question

holly_hobby

real1314 wrote: »

Yep, that's it.

so why not by just moving the equity? :cool:

Because this wouldn't be a permitted HMRC deduction under current regs.

real1314 wrote: »

Which tax rules prevent them from withdrawing the £40k of equity capital held in the property, and replacing this with a loan, which in this case already exists and is secured on a different property?

Well firstly because under your plan, there is no capital being withdrawn from the business, neither has any element of the resi mge been used to fund the business. Accordingly, attempting to offset any element of the current resi mge as suggested, would fail to comply with HMRC requirements, which are detailed in BIM45700 - so to answer the Q, this is the tax regulation that prevents the suggested exercise.


For clarity and to top and tail this, because currently no element of the OPs residential mortgage forms part of, nor has any connection to the business (aka the let property) it is not a permissible business deduction.

Essentially, for the OP to be able to offset 40k of her resi mge as suggested (or indeed any amount), against business income, there must be a clear audit trail between the 2.

E.G - if she secured a resi mge on her own home (by either a further advance or remortgage), and then used the released equity to fund the business, in this case it funded the purchase (by providing the deposit), or it was later released and invested into the business via funding of repairs/upgrades, or even directly utilised to reduce the amount of BTL secured finance secured - that would all be permissible.

However, if as suggested, the OP should offset against the business income, 40k of her own private resi mge interest, it having no connection to the business, other than the sum being equal to the current free equity in the property - then this would be unlawful as the 2 have no direct connection, with the resi mge interest being offset, having no direct relation to the financing of the business, therefore rendering it as not a permitted business deduction.

I must be clear, the fact the OP previously used her own savings/capital to fund the original deposit and purchase of the property, which was her first home and subsequently let (with the pch pre-dating ownership of her private residence), be that 40k or any other figure, has absolutely no relevance or attachment to her current and/or any subsequent resi mge borrowings - as one clearly didn't fund the other. Accordingly, whilst she may withdraw it from the BTL business via finance (and offset any interest charges), she can't substitue its withdrawal by merely applying 40k of her own private borowings against the business.

Hope the above couple of examples have helped explain and demonstrate the issues ?

The good news here though, is that the OP understands the process, which is why they are seeking to withdraw capital from the business (via a BTL equity release exercise ), to directly reduce her own resi mge - which as I've said earlier is perfectly permitted as the BTL equity released is simply classed by HMRC as "capital withdrawal" from the business - and therefore has their permission to offset, as a business expense, any resulting accruable interest.

I hope I've briefly explained the basis of permitted offsetting re business expenses ok, and how it would apply in the OPs current situation.

Hope this helps

Holly x

PS - have dug this for you, if further clarification or confirmation of the above is reqd for understanding - http://www.hmrc.gov.uk/manuals/bimmanual/bim45700.htm