mortgage interest tax relief against rental income question

silvercar

Sorry, yet another mortgage interest tax relief against rental income question.

Completed on a BTL property and PPR (house move) on the same day; all part of the same chain.

BTL mortgage on the rented property and the deposit for the BTL property was effectively part of the mortgage on the PPR. So (Q1) am I right in thinking that I can claim mortgage interest relief on the whole of the BTL mortgage and a proportion of the PPR mortgage eg BTL purchased for say 130k. BTL mortgage of 100k and PPR mortgage of say 200k of which 30k represented the BTL deposit. So by my reckoning I could claim tax relief on the mortgage interest on the 100k BTL mortgage and 30/200 ths of the PPR mortgage.

At a later date, the mortgages are becoming expensive, so decide to reduce by £20k from earnings/ savings. Now without the rental property, this money would have been used to reduce PPR mortgage. As interest rate on BTL was higher, it was used to reduce that one instead. So now there is say 80k mortgage on BTL and still 200k on PPR. (Q2) I would want to argue that 50/200ths of the PPR mortgage should be attributable to the BTL. Is that acceptable? Otherwise I have lost 20k of mortgage interest relief for ever!

Now moving forward the PPR mortgage is changed to an offset, so the interest charged is reduced by the amount of savings and current account balance. (Q3) Should the same proportion of the interest (50/200 ths) still be used to identify the interest eligible for relief or could I argue that the savings reduction in interest rate charged should all be attributed to the PPR?
I would argue that eventually I hope to have the mortgage completely offset, so there would be no interest charged (just a pool of money available to me), so to not allow any mortgage relief would be unfair.

Interested in any opinions, especially the decision to change to an offset mortgage may need reviewing of the tax treatment negates the benefit.

MarkyMarkD

(Q1) Yes. You borrowed £130k to fund the purchase of the BTL so interest on £130k is allowable.

(Q2) Yes. It's irrelevant which loan you paid down. You borrowed £130k for your BTL business and your BTL business didn't repay the £20k.

(Q3) The offset is attributable to the PPR and the full £130k remains relevant for the BTL.

Offset only becomes silly if your total borrowing (net of offset) gets to be less than £130k because then you are obviously losing tax relief benefit.

silvercar

Thank you.

Q3 was the one I was really unsure of because I would then be dumping the 50/200 ths calculation and calculating 50k interest at the mortgage interest rate.

MarkyMarkD

The important point in all this is that once you have borrowed money for a BTL, you have no obligation to use the profits of the BTL business to pay off the borrowing. That's the part which (IMHO) doesn't make sense.

BTL tax relief should be limited to the amount borrowed LESS any cumulative profits. But AFAIK that is not the case.

iazms

So say for example PPR mortgage has £80k left. I then buy a house to rent and get a BTL mortgage on it for £130k. Because the interest rate is higher on the BTL house, if I make a bulk payment of £20k on the BTL mortgage will my mortgage interest relief remain at £130k ? And I will have reduced my PPR to £60k - right?

Apologies if this is a repeat of what silvercar asked, just trying to get my head around it.

Thanks

silvercar

Thanks Jimmo, just wanted to confirm things before I submit 2006/07 return.

Its the offset on the PPR mortgage thats complex when considering that some of the PPR mortgage is really a mortgage for the letting business, so I want the offset savings to all be set against my PPR not proportion between the two.

MarkyMarkD

iazms wrote: »

So say for example PPR mortgage has £80k left. I then buy a house to rent and get a BTL mortgage on it for £130k. Because the interest rate is higher on the BTL house, if I make a bulk payment of £20k on the BTL mortgage will my mortgage interest relief remain at £130k ? And I will have reduced my PPR to £60k - right?

Apologies if this is a repeat of what silvercar asked, just trying to get my head around it.

Thanks

Yes.

As jimmo says most eloquently, you need to consider the BTL business and yourself as separate entities. It's irrelevant whether the borrowing is on a BTL mortgage or a PPR mortgage; the important issue is that you have borrowed money (by whatever means) and lent it to your BTL business.

How you choose to arrange the borrowing that you lend to the BTL business is up to you.

iazms

MarkyMarkD, Silvercar and Jimmo - you are stars!. Thanks so much for taking the time to answer the questions I've been asking. I've learnt so much this last week or so and really appreciate it. No doubt I will have more burning tax questions in the future but thanks once again.