Mortgage interest as an expense - wholly and exclusively test

Ed-1

Ignoring the changes to being able to offset mortgage interest against rental profits as an expense (it's being replaced with flat rate relief), would I be able to count interest on the following mortgage as an expense against rental profits in the following scenarios?

(A) A mortgage secured against my residence which is used to purchase a buy-to-let.

(B) A mortgage secured against my residence which is used to purchase a buy-to-let which is then sold and another buy-to-let is purchased with the proceeds.

(C) A mortgage secured against my residence which is used to purchase a buy-to-let which is lived in for the first year rent-free by a family member and then is let commercially. [I'm aware it can't be counted as an expense against other rental income while it's not let on commercial terms*]

(D) A mortgage secured against my residence which is used to purchase a buy-to-let which is lived in for the first year rent-free by a family member, and is then sold (to the family member) and another buy-to-let is purchased with the proceeds (and is let commercially).

*If a property is occupied rent free, it is completely outside the property income regime - there is no exploitation of it as a source of rents or other receipts

If a property is let at less than the full commercial rent, any expenditure relating to that property will normally have been incurred partly for a benevolent or philanthropic purpose and will consequently fail the wholly and exclusively test. Although, in strictness, no expenditure on such properties is admissible as an expense of the rental business, expenses can be deducted up to the amount of rent derived from that property.
https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2130

AnotherJoe

I think both would be allowed. But then I'm not a tax inspector.

00ec25

I see you have not understood the fundamentals.
What the loan is secured on is utterly irrelevant.
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim45685

What matters is the purpose of the loan and whether it is separately identifiable
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim45675

https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim45650

in your case:
a) yes, see here:
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim45690
b) yes
c) yes, but note the costs of mortgage fees etc cannot be claimed as the letting is non commercial:
https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2105
nor can interest based on certain other costs be claimed if rolled into the sum borrowed
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim45820
d) as c)

Ed-1

00ec25 wrote: »

I see you have not understood the fundamentals.
What the loan is secured on is utterly irrelevant. What matters is the purpose of the loan

see

in your case:
a) yes
b) yes
c) yes

Why would (D) not?

AlexMac

I've done versions of these; I just kept the paper trail evidencing the 20+ years of borrowing, selling and buying. In fact, I've saved the taxman maoney, becaus e% interest on a 75% BTL loan would have been gazillions more than on a much smaller Value-to-loan mortgage on my home.

00ec25

Ed-1 wrote: »

Why would (D) not?

hit the post button before i'd finished looking up the HMRC links
go read the now completed post....

Ed-1

00ec25 wrote: »

hit the post button before i'd finished looking up the HMRC links
go read the now completed post....

AlexMac wrote: »

I've done versions of these; I just kept the paper trail evidencing the 20+ years of borrowing, selling and buying. In fact, I've saved the taxman maoney, becaus e% interest on a 75% BTL loan would have been gazillions more than on a much smaller Value-to-loan mortgage on my home.

So what is the test? What the purpose of the loan was initially regardless of what the money is used for down the line? If you use a mortgage to buy a buy-to-let property but then sell that buy-to-let property without buying another but you still hold the mortgage, can you continue using that mortgage interest to offset profits on other buy-to-lets, simply because it was used to purchase a buy-to-let in the first place even though you no longer have the buy-to-let it was used to purchase?

If that is the case, you could use a mortgage to purchase a buy-to-let, then sell the buy-to-let and use the proceeds for something completely outside the property rental business and still use the mortgage interest to offset rental income from other buy-to-let properties you hold. Or does the proceeds from the sale of the buy-to-let have to be used to purchase another buy-to-let to continue claiming the mortgage interest expense?

If a mortgage is initially used to purchase a "buy-to-let" which is never actually let (on commercial terms) and is then sold, can the interest be claimed as an expense against other rental income? If the proceeds of the sale are used to purchase another buy-to-let which is let on commercial terms, does this change anything?

00ec25

Ed-1 wrote: »

So what is the test? What the purpose of the loan was initially regardless of what the money is used for down the line? If you use a mortgage to buy a buy-to-let property but then sell that buy-to-let property without buying another but you still hold the mortgage, can you continue using that mortgage interest to offset profits on other buy-to-lets, simply because it was used to purchase a buy-to-let in the first place even though you no longer have the buy-to-let it was used to purchase?

If that is the case, you could use a mortgage to purchase a buy-to-let, then sell the buy-to-let and use the proceeds for something completely outside the property rental business and still use the mortgage interest to offset rental income from other buy-to-let properties you hold. Or does the proceeds from the sale of the buy-to-let have to be used to purchase another buy-to-let to continue claiming the mortgage interest expense?

If a mortgage is initially used to purchase a "buy-to-let" which is never actually let (on commercial terms) and is then sold, can the interest be claimed as an expense against other rental income? If the proceeds of the sale are used to purchase another buy-to-let which is let on commercial terms, does this change anything?

if you bothered to read the links I gave you then you would find out what the limitations are. There is a limit to how much spoon feeding is given to someone who does not say thanks.

Ed-1

00ec25 wrote: »

if you bothered to read the links I gave you then you would find out what the limitations are. There is a limit to how much spoon feeding is given to someone who does not say thanks.

I have read the links but I'm still not completely clear. And I did thank your post, but somehow it wasn't showing when I came back to it today.

It's the longer-term stream of transactions that I'm unsure about with regards the 'wholly and exclusively' for the business test.

Example
You obtain a mortgage to purchase an asset entirely unrelated to the property business. But later you then sell that asset and buy something that is wholly and exclusively for the property business. Can you then say that the mortgage was used to purchase an asset wholly and exclusively for the property business?

If you sold the asset for more than you originally bought it for and thus get more cash than you originally borrowed, then the borrowing amount is still taken to be what was originally borrowed and not the revalued amount?

Does every transaction along the line have to have been wholly and exclusively for the property business, or when you sell an asset and get cash back, can you then re-use that cash (which was originally borrowed) to buy an asset that is wholly and exclusively for the property business?