Convert Home to BTL - Can not offset interest cost against rental income

jediknightwarrior

Hi,

Just wondering if there are any tax gurus who can help settle a disagreement with a friend?

His home's currently worth around £200,000 and he has £12,000 outstanding on his mortgage. He's looking to move and wants to rent out his current property.

He's about to remortgage his home onto a buy to let mortgage for for £170,000 and wants to use the £158,000 equity released to fund the deposit on his next home.

I told him he's mad to do this as he'll only be able to offset the interest on £12,000 against the rental income. He would be better off selling and buying 2 properties, his home and a buy to let.

He disagrees and thinks he'll be able to offset the cost of the interest on the full £170,000 against the rental income.

Can anybody help sellte this?

Thanks

morgani

Somebody may be along later with more knowledge but I'm fairly sure your friend is correct.

The reason being is that the interest on the £170k mortgage on the old home being let out will have been accrued on that property so will be an allowable expense against any rental income.

jediknightwarrior

Thanks morgani,

I will check with the Inland Revenue tomorrow. About 4 years ago they told me I could only offset the inital borrowing (ie £12,000 in my friends case) as the equity I was releasing, by doing the same thing as my friend, was being used to purchase a residential property.

silvercar

the mortgage interest is an allowable expense against the rental income, upto the value of the property when he first started letting it.

jediknightwarrior

Thank you all. I'm glad to have been proved wrong!!!

Shame on the Inland Rev. I did call them. Again they told me I could not offset the additional interest.

HugoSP

jediknightwarrior wrote: »

Thank you all. I'm glad to have been proved wrong!!!

Shame on the Inland Rev. I did call them. Again they told me I could not offset the additional interest.

Call them again and direct them to that link that jimmo posted.

agarwald

In a similar vein, I have an offset mortgage on my house which I was in credit across my various accounts, and was therefore paying no interest. I used some of the borrowing facility I had to buy an investment property, and I have been offseting the interest on my mortgage against this, even though the mortgage is secured against my home, rather than the investment property - the reason for accruing the interest was the purchase of the buy-to-let house. I have another buy-to-let on which I have a seperate mortgage but it has quite a high rate of interest, can I repay this mortgage with additional draw down from the borrowing facility I have on my house and claim the interest against the rental income? It will be less interest than I am currently claiming. Note that, as this is an offset mortgage, so although I know that all interest is due to the investment properties, it's not possible to say what interest is against what property.

Confused? I am.

silvercar

can I repay this mortgage with additional draw down from the borrowing facility I have on my house and claim the interest against the rental income?

Yes, all you are doing is moving your borrowing around to secure the best rate you are not changing the position of having borrowing of X for your BTL business.

Note that, as this is an offset mortgage, so although I know that all interest is due to the investment properties, it's not possible to say what interest is against what property

Doesn't matter, it is the purpose of the loan that counts not where it is secured.

The only time I think it gets iffy is if the savings in your offset mortgage are so great that you actually don't pay the amount of interest you want to claim as an allowable expense.

agarwald

In a similar vein, I have an offset mortgage on my house which I was in credit across my various accounts, and was therefore paying no interest. I used some of the borrowing facility I had to buy an investment property, and I have been offseting the interest on my mortgage against this, even though the mortgage is secured against my home, rather than the investment property - the reason for accruing the interest was the purchase of the buy-to-let house. I have another buy-to-let on which I have a seperate mortgage but it has quite a high rate of interest, can I repay this mortgage with additional draw down from the borrowing facility I have on my house and claim the interest against the rental income? It will be less interest than I am currently claiming. Note that, as this is an offset mortgage, so although I know that all interest is due to the investment properties, it's not possible to say what interest is against what property.

Confused? I am.

silvercar

can I repay this mortgage with additional draw down from the borrowing facility I have on my house and claim the interest against the rental income?

Yes, I've done this.

You can claim the interest on an amount upto the value of the property when you started renting it. You don't need to divide the interest amongst the rental properties.