Is interest on BTL mortgage tax deductible?

TwinMum_2

I am in the very fortunate position of owning outright :j a house that I currently let out. I am looking to get a BTL mortgage on that house so that I can raise funds to buy a new house for my family.
Is there any tax benefit of getting the mortgage on the BTL house rather than the house that we are going to live in??

abankerbutnotafatcat

Yes it is.

TwinMum_2

I was wondering whether because I already own the place and am clearly raising funds for my own house, that maybe it wouldn't be...

TwinMum_2

I'm going to need mortgages on both houses.

TrickyDicky101

Your rental profits can be offset by the BTL interest to the extent of the valuation of the BTL when first brought into use as a rental property. Hence, if the property was worth £30k when you first started renting it and is now worth £130k and you borrow £100k on your BTL, you can only get relief for the interest on the £30k.

This shouldn't cause you an issue if you haven't been renting too long of course (unless property values have skyrocketed and you are trying to access this equity).

Is it worth doing? Depends on whether the residential mortgage you take would still cost less than the after tax cost of your BTL. This will also depend on your marginal rate of tax (more beneficial if you are 40%+ tax payer).

TwinMum_2

I didn't realise that it was the value of the property that was important. I thought it was the rental charged vs the mortgage paid - I.e. Whether it's just 'washing it's face' ??

jjlandlord

You can borrow as much as you want and get full tax relief on the interests as long as the loan is used exclusively to fund the business.

To re-use the previous example, if the property was worth £30k when you started letting it, is now worth £130k, and you borrow £100k on it to fund the purchase of a £100k property then you can claim the interests in full.

If you borrow for another purpose then the limitation given above (by TD101) applies.

You should also consider that the interest rate of a BTL mortgage will probably be higher than the rate of a residential mortgage.

booksurr

TwinMum wrote: »

I didn't realise that it was the value of the property that was important. I thought it was the rental charged vs the mortgage paid - I.e. Whether it's just 'washing it's face' ??

the rules are as TD101 relates

it is acceptable to borrow against a let property and spend that money on buying your residential house and claim the interest on that loan against the let property, but...

to put some sort of limit on things the max amount of interest you can claim as a letting cost is indeed limited to the amount of the loan represented by the value of the let property when you first started letting it. That is just how it goes, if you haven't got a valuation ready at that point in time you will need one to support your claim.

booksurr

jjlandlord wrote: »

You can borrow as much as you want and get full tax relief on the interests as long as the loan is used exclusively to fund the business.

To re-use the previous example, if the property was worth £30k when you started letting it, is now worth £130k, and you borrow £100k on it to fund the purchase of a £100k property then you can claim the interests in full.

If you borrow for another purpose then the limitation given above applies.

OP is proposing to "withdraw capital from the business" and spend that money on the purchase of their residential property

therefore there is a cap on how much of the interest charge is an eligible cost against the business

you are correct in starting that the total amount to be borrowed is not limited, but the proportion of interest eligible as a cost is capped at the market value of the property when first let - this is explained in BIM 45700 http://www.hmrc.gov.uk/manuals/bimmanual/BIM45700.htm

jjlandlord

Yes, as I said in agreement with TD101:

jjlandlord wrote: »

If you borrow for another purpose then the limitation given above applies.

Are we going to start creating arguments for no reasons again?

booksurr

jjlandlord wrote: »

Yes, as I said in agreement with TD101:

Are we going to start creating arguments for no reasons again?

no i was answering the question asked by the OP, your comment could be misleading since the only bit that relates to the OP is that the rule you set out is different for her exact circumstance, so your initial comment is irrelevant to the question hence my reiteration of the topic at hand