Paying Off PPR Mortgage and Claim Interest Relief

iazms

Right..this is an example I've found on a diff site...Want your opinion guys - Is this true? Is this allowable?

"John buys a property for £200,000. He provides a £40,000 deposit and borrows £160,000. 5 years later the property has increased to £250,000. This means that he has £90,000 equity in the property.

He decides to remortgage the property to a value of £200,000 thus releasing £40,000 of equity from the property. He uses the £40,000 equity release to reduce the mortgage on his main residence by £40,000 and still claims interest relief on this equity release.


Now you will be asking how is this possible?

Well, don’t forget the property was bought into the lettings business when it was purchased for £200,000. The additional amount of equity released has not taken the borrowing over £200,000, so the entire interest amount charged can still be offset against the rental income.

So, if say, for example he is paying £200 a month interest on the £40,000 then he will be able to now offset this interest against his rental income."

Thank for reading

cash99

You can claim interest relief on a loan up to the value of the property when it was first let, so in the example quoted the interest would be deductible from the rental income.

iazms

Anyone else...specifically to this example ??

Pennywise

Yes, that's right - virtually identical to the example given on HMRC's own website.

iazms

Its just on these forums I've been learning its not about what you get the loan on but the purpose of it. In this example we see £40,000 being borrowed to reduce the PPR mortgage. So it is being used for personal purposes and NOT his business. So this tends to confuse me. I understand the bit about it not exceeding the value of the property when first let. But what I don't understand is how come the IR can be claimed on the £40k when used for personal purposes.

If someone can clear this up for me much appreciated.

MoneyTown

iazms wrote: »

Well, don’t forget the property was bought into the lettings business when it was purchased for £200,000. The additional amount of equity released has not taken the borrowing over £200,000, so the entire interest amount charged can still be offset against the rental income.

Is this inflation linked?

For instance, if this is over many years, can the £200,000 be increased to its current value?

iazms

Nop pretty sure it can't

iazms

So can this example work the opposite way. Eg John has £50k mortgage on his PPR outstanding. A year later he buys a house from his dad for £100k with the intention of letting. But no cash was exchanged. So can the outstanding mortgage on the PPR now be claimed as IR? Because John could quite easily have got a mortgage for £50k on the BTL when he purchased it and pay off the PPR which takes us back to the first example.

Thanks

silvercar

Its all about the value of the property when it was first let, not where the money is secured or what purpose any released money is used for.

Your new example is confusing as John hasn't paid anything for the house. If he had paid money for the house that he had borrowed by taking a mortgage on his PPR that borrowed money would be allowable.