Tax Return - First Timer

ncpierce

Hi,

I have been a lurker for a while, picking up hints and info from other posts but now have my own problem.

I have filled in a SA for the first time this year as from April 2012 I started renting out my flat, after buying a second property with my wife. Having put the numbers in the tax return, and given that I am still paying a mortgage the level of tax that I need to pay wipes out any money that I have 'made' over the course of the year and I will need to pay around £1500 in tax. :eek: Having read around a bit it seems that I could be being a bit cleverer and offsetting against the other mortgage.

Here are the basic facts:-

My Flat - purchased May 2004 and lived in until March 2012. I paid around £190k and at the moment there is around £65k left on the mortage. Currently worth around £220k. I am the sole name on the mortgage.

Our House - purchased November 2011. We took a mortgage out of £235k to cover the purchase price of £325k and put some savings in to pay the deposit.

Now if I had sold the flat in late 2011/early 2012 I would have probably got around £215k and taking off the mortgage outstanding at that time I would have around £140k of capital that I could have put into the new house thereby reducing the mortgage to around £95k. Can I offset the mortgage interest payments on £140k of my current mortgage against the rental flat even though the mortgage on the house is in joint names? If so how do I show this to the tax man?!?!

Thanks in advance.

Nigel

LittleMax

Did you get anywhere with getting any answers from elsewhere Nigel? We are in a very similar position, though both properties and mortgages are in joint names.

LittleMax

I've come to the conclusion the answer is no. This is the best summary I have found...http://www.theguardian.com/money/2010/nov/24/offset-mortgage-interest-own-home

morgani

Missed this one before. There are some circumstances where indirect borrowing can work but not like this.

i would say its a no.

if you want to reduce the profit and therefore the tax then you could increase the mortgage on the rental property and reduce the borrowings on your main home.

although this may save tax it may not save money overall. You should look at the effects it may have inckuding legal and arrangement fees.

alberto2012

ncpierce wrote: »

Hi,


I have filled in a SA for the first time this year as from April 2012 I started renting out my flat, after buying a second property with my wife. Having put the numbers in the tax return, and given that I am still paying a mortgage the level of tax that I need to pay wipes out any money that I have 'made' over the course of the year and I will need to pay around £1500 in tax. :eek:

Same boat as you mate...

My figures (if correct) are a joke!

jimmo

This seems to be a regular topic on all sorts of forums. You will find lots if you Google BIM45700 but this is a link to the page in the manual.
http://www.hmrc.gov.uk/manuals/bimmanual/bim45700.htm
Example 2 seems to be the most appropriate here but it is worth remembering that this comes under the general heading “Withdrawal of capital from a business”.
Its something that the tax professionals should easily understand but impossible to gauge whether others will.

It’s a bit abstract but think of yourself as a person and your lettings business (the flat) as 2 separate entities.
You have, effectively, sold the flat to the business at its open market value at the date the lettings commenced. So the business now owns the flat and owes you whatever it was worth when you started letting on an interest free mortgage.
When you bought your house you were perfectly entitled to tell the business that you want the money it owes you. That forces the business to borrow money from elsewhere.
In buying your house you take out a new mortgage, but it is a joint mortgage between you and your lettings business. You, personally, have paid for your new house with money the business has repaid you and topped that up with the balance of your personal share of the mortgage. The business has repaid you what it owed you but replaced its debt to you with its share of the joint mortgage.
Therefore the interest that the business has to pay on its share of the joint mortgage is a legitimate cost of the business and an allowable deduction.


Lots of people seem to get hung up on the fact that you took out a residential mortgage and think, because of that, the purpose of the mortgage was to buy your house. It was not. The purpose was as above.
It may also he helpful to look at BIM45685
http://www.hmrc.gov.uk/manuals/bimmanual/BIM45685.htm
Whilst the example there is about the purchase of an HGV the principle is exactly the same. The business needed to borrow money to pay for a business asset but the security for the borrowing was the businessman’s home.