Tax relief on interest for additional borrowing

MRPb

Hi, I'm just trying to figure out if tax relief on interest could be claimed in this scenario.

Landlord owns a house outright (no mortgage)

Wants to buy a house to live in so intends to borrow against the BTL property (as the LTV is better and an interest only loan can be taken).

Would the interest on this new mortgage attract tax relief?

If the interest was £10k per year that would amount to £2k per year saving ?

Thanks for any thoughts or advice.

theartfullodger

Don't think so.  

sheramber

Increasing your mortgage

If you increase your mortgage loan on your buy-to-let property you may be able to treat interest on the additional loan as a revenue expense, or get relief against Income Tax as long as the additional loan is wholly and exclusively for the purposes of the letting business.

Interest on any additional borrowing above the capital value of the property when it was brought into your letting business is not tax deductible.

https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income

Bookworm105

what you are proposing is called withdrawing capital from the business - see example 2 in first link below. Sheramber's emboldening regarding wholly and exclusively is often misinterpreted as meaning what the money is used for, that is not so.

it is indeed permitted to use money from a loan secured on the rental property to fund purchase of your private house

as you appear to be aware, the tax relief is capped at 20%. However for your £2,000 on £10,000 to apply the tax due on the rental profit would need to be at least £2,000 in order for the full relief to have somewhere to be used up on. I assume you fully understand how to calculate the tax relief and the fact it is not a deduction from profits?

there is also a ceiling limit to the max size of loan, in practice that means the value of the rental property when first let, which obviously is not always the value at the time the loan is taken out. The overall ceiling is technically called "overdrawn capital account" 

BIM45700 - Specific deductions - interest: Withdrawal of capital from a business - HMRC internal manual - GOV.UK

BIM45705 - Specific deductions - interest: Overdrawn capital account - HMRC internal manual - GOV.UK

MRPb

Thanks for these replies- just reading the links now, thanks also for these.

Just wanted to clarify a couple of things - the house is not in a ltd company.

Bought in 1991 for £118,500 
First let in June 1996.

Is there any official source I could use to calculate the value at first letting? 

Bookworm105

MRPb said:

Thanks for these replies- just reading the links now, thanks also for these.

Just wanted to clarify a couple of things - the house is not in a ltd company.

Bought in 1991 for £118,500 
First let in June 1996.

Is there any official source I could use to calculate the value at first letting? 

you are operating a rental business, the business income manual does not relate only to company or Ltd 

there is no official source of historic valuations which is publicly accessible. It is up to you to justify the value you use if HMRC challenge it. You may do it cheaply by looking up sold (not asking) prices for similar property on, for example, Rightmove or you may pay a professionally qualified valuer to produce a report which they will then stand by if it came to an HMRC enquiry.

HMRC has their own department (Valuation Office Agency) which has its own views on historic values and those would be the ones they confront your own valuation with. But reaching that stage (formal tribunal) is rather unlikely.

theartfullodger

MRPb said:

Thanks for these replies- just reading the links now, thanks also for these.

Just wanted to clarify a couple of things - the house is not in a ltd company.

Bought in 1991 for £118,500 
First let in June 1996.

Is there any official source I could use to calculate the value at first letting? 

The valuations you got prior to the letting from (usually 3) local estate agents. 

MRPb

If I am reading Case2 correcly then looks like this will be allowable

gov.uk/hmrc-internal-manuals/business-income-manual/bim45700

Bookworm105

MRPb said:

If I am reading Case2 correcly then looks like this will be allowable

gov.uk/hmrc-internal-manuals/business-income-manual/bim45700

hence me telling you it was possible and giving you that link in the first place to evidence it 

MRPb

Re: "hence me telling you it was possible and giving you that link in the first place to evidence it "

Thanks Bookworm, yes just wanted to confirm that case 2 in particular seems to exactly demonstrate what you said