Let To Buy - How to Split the Loan

sleeps

Currently own property in London which has been let out for last 8 years as working overseas (exceptional permission given to rent). Now returned to UK but relocated to Northants so keen to continue letting it. Plan to use switch to buy to let mortgage to release deposit for new property. Property currently valued at approx £230k with £30k and 5 years remaining on mortgage and rented out for £1000 per month. Saw Halifax today. They have recommended buy to let loan for £85,000 and £150k loan on new property. Instinct telling me I should put the higher risk on existing property and lower risk on new property which we will live in, especially as interest can be written off against tax on buy to let property. What is the right way to go?

Thrugelmir

Starting gross yield of 5% on the BTL. Before voids, expenses, tax etc.

Personally I would sell the BTL and inject all the capital into the new property. Better returns elsewhere if you have cash to invest.

Much has changed in the 8 years you've been gone.

holly_hobby

Be careful .... although equity release is classed as capital withdrawal, mge interest as a permitted IT deduction, is capped at the value of the property when it entered the business (ie became available for commercial letting).

In theory though yes, it make more financial sense to have your business mge (which has tax breaks) effectively purchasing your private residence (no tax breaks) upto the valuation cap - as your accountant will confirm.

However, BTL payrates are higher than resi, so you do need to keep in mind that the larger the BTL mge, the higher the rental requirement for both BTL finance purposes and to retain net yield, and the more you'll need to find from personal finances for periods of unoccupancy when the mge will still need to be serviced.

Have a chat with your accountant, whom will guide you on the best way of balacing the figs for max benefit and financial protection.

Hope this helps

Holly

kingstreet

That level of rental income will support a mortgage of upto £160k, which is 70% of the property value. To get the best BTL rates, you need to be at 60%, so borrow £138k that way, repay the existing £30k and that leaves you £100k deposit for the purchase, net of any fees of course.

Chances are, as long as you aren't buying for more than £250k, you'll need a new mortgage of 60% of the property purchase price or less, getting you the best rate on the residential mortgage.

I would also seek professional advice on the allowable nature of the interest on the let property. I know the book says it should be allowed and it's all about the use of the money not the property it's secured on, but not so long ago we had someone on here asking the same questions, was given the same answers and didn't bother to seek professional advice. He then came back to say his mortgage interest was not being allowed by HMRC.

holly_hobby

That doesn't sound right at all .... and I can only think that the equity release and resulting mge, took the capital account overdrawn, ie they tried to reclaim interest on a mge that exceeded the business capital injection (ie exceeded the value of the property when it entered the business). OR, they sought a loan which wasn't wholly associated/injected into the business - as only that relating to the business again is a permitted deduction (interest).

Otherwise, as long as the capital account does not go overdrawn, the equity release and resulting interest on the BTL mge, is a perfectly permitted IT deduction, and indeed commonly used.

I'll dig out some HMRC guidance papers tomorrow, but this is a brief guide -http://www.hmrc.gov.uk/manuals/bimmanual/BIM45700.htm.

Hope this helps

Holly

kingstreet

There was nothing wrong with it at the time - it was within the original value and he borrowed to use the money as a deposit for a residential. It was a bit embarrassing but I had told him to get professional advice before proceeding and he failed to do that. I don't know the reasoning behind it.

I'll see if I can dig up the thread.

holly_hobby

Ok Kings, but if thats the case he should appeal that ruling with HMRC as its clearly wrong (if the facts in his post were the same as HMRC assessed .... which as we know with clients, what they tell you and what are the actual true facts are can be somewhat different !)

H x

kingstreet

Found it.

This is a link to the result thread. There's a link to the original thread within it;-

https://forums.moneysavingexpert.com/discussion/4390533

holly_hobby

Right ... just read the first couple of posts on the thread .....

What the OP did was simply try to offset his private residential mge interest, against the rental income of the BTL, which is not permitted as there is no association between the 2.

His reasoning was that he could have withdrawn the capital out of the business (ie BTL equity release) instead of securing a resi mge, but choose not to and leave the capital in the business. So instead he reasoned he should be just able to offset the same amount of resi mge borrowings and interest against the rental income, as to what would be available from the available equity in the BTL if he chose to withdraw the capital.

It was quite rightly rejected by HMRC - private loans are not deductable, as they have no association to the business.

The correct way would have been to effect a BTL FA or RMG (upto the value on entry into the business) - the interest being incurred by the business (aka the BTL mge) to facilitate the capital withdrawal, being a permitted allowance.

It can be complicated ....

Hope this helps

Holly

kingstreet

You're right. It wasn't the same.

He'd raised the money wholly on the new residential property.

holly_hobby

He was a silly billy !!

Night x