Interest payments as "allowable expenses"?

[johne1234]

Hi all,
I have a quick question I hope someone can help with:
I am considering renting out my property, & am aware that I can claim my monthly mortgage interest payments as "allowable expenses" for tax purposes.

However, I am wanting to release extra equity in my property by obtaining additional borrowing against it, just before my first tenants move in.

Obviously, my new monthly interest payments will now be higher. My question is: can I claim my new (higher) monthly interest payments as "allowable expenses", or do I have to use the original (lower) interest payments figure?

Many thanks in advance,
John

[Tax Accountant]

Hi all,
I have a quick question I hope someone can help with:
I am considering renting out my property, & am aware that I can claim my monthly mortgage interest payments as "allowable expenses" for tax purposes.

However, I am wanting to release extra equity in my property by obtaining additional borrowing against it, just before my first tenants move in.

Obviously, my new monthly interest payments will now be higher. My question is: can I claim my new (higher) monthly interest payments as "allowable expenses", or do I have to use the original (lower) interest payments figure?

Many thanks in advance,
John

For the purposes of this reply, I will assume that you were using this property as your only or main residence from the date of purchase until now.

You could borrow upto the value of the property at the date when you first start letting your property. All interest on such loan would be eligible for claiming as an expense of your letting business.

By way of an example, assume you bought the property for £125,000 and the outstanding loan is in the sum of £75,000. If the value of your property has gone up to say £175,000 by the time you first start letting your property, you could increase your borrowings on the property by upto £100,000 and still be able to claim tax relief on the total borrowings of upto £175,000.

Rememeber that you could only claim the interest and not any capital repayments included in the monthly instalments. For this purpose, it is best to obtain a loan interest certificate from your lender each year or extract the interest charges from the loan statements issued by the lender.

By letting your property which was also your own residence previously, you could let for at least 3 years and still not pay any Capital Gains Tax. In prectice you could let for a much longer time than 3 years and still pay little or no Capital Gains Tax due to availability of Residence relief, Lettings relief, taper relief, and annual exemption.

I hope this helps.

Perhaps you could care to score a rating for this reply.

Ramnik

[johnj]

Depends upon what the extra loan is used for.
Interest relief comes from a qualifying loan and a qualifying purpose.
Generaly if the purpose qualifies you should expect relief.
If the original loan was to buy the house then this now gives you the prospect of rent and should qualify. If the new loan were to be for an extension (say capital improvement) of that property or to buy another investment property then you would expect relief. If the additional loan is for personal expenses then it is not a qualifying loan and you should not expect relief. I can send you a note on the subject if you wish.

[johne1234]

Thanks for these replies. However I now seem to have 2 contradictory answers!

To clarify the situation: I am currently living in this property (currently my only property), & I intend to buy another flat, which I will then live in. I will then rent out my existing property. In order to get a larger deposit to buy my new flat, I will borrow approx another £100k against my existing property (this will be done before any tenants have moved in or signed anything).

So, is it the case that I can't actually treat the interest payments on this extra £100k as allowable expenses? (even though it is interest on the loan against the property which I am renting out)?

[Tax Accountant]

Thanks for these replies. However I now seem to have 2 contradictory answers!

To clarify the situation: I am currently living in this property (currently my only property), & I intend to buy another flat, which I will then live in. I will then rent out my existing property. In order to get a larger deposit to buy my new flat, I will borrow approx another £100k against my existing property (this will be done before any tenants have moved in or signed anything).

So, is it the case that I can't actually treat the interest payments on this extra £100k as allowable expenses? (even though it is interest on the loan against the property which I am renting out)?

Hi John,

I can symphathaise with your predicament. However, I can categorically confirm the other person's reply is not correct in your circumstances. As the saying goes, half knowledge is dangerous.

I can only repeat as follows from my previous reply:

''You could borrow upto the value of the property at the date when you first start letting your property. All interest on such loan would be eligible for claiming as an expense of your letting business.''

I can go further and say that you could use the money for ANY purpose you like so long as the borrowing is secured on the property which you will let.

This reply is applicable only in your circumstances and should not necessarily apply to everyones individual circumstances.

I cannot be any more clearer than this.

Ramnik

[johne1234]

Ramnik,
Thanks for your reply, this is very useful information.
John

[Grange]

I disagree with Karango. This is a complicated area of tax law, and my view is that he is wrong.

If you bought your original property for 125,000 then you can only claim interest relief on 125,000, even though it is now worth 175,000. You could of course take out a further loan against the property for improvements, in which case you could claim the interest expense of that further loan.

When deciding if loan interest is an allowable deduction, you must look at the purpose for which the money is borrowed.

Your original property cost 125,000 therefore any loan in excess of this would not be for the purpose of financing property 1 - your letting business - but would be for the purpose of buying your new property.

What you have offered as security is irrelevant. Imagine a different scenario where you have paid off your mortgage on property 1, and want to buy a second, rental, property. You could offer property 1 as security and buy-to-let property 2. Your allowable loan interest would be on 100% of the value of property 2 - irrespective of whether you have the loan secured on property 2.

You should go to an accountant and get written advice from him. You should not be relying on hearsay from an internet chat room like this one for important issues like this one.

[johnj]

I agree with Grange and his disagreement with Karango. You can only get relief for loans taken for a qualifying purpose whether the loan(s) amount to more or less than the original cost of the asset upon which they might be secured.

[MrShed]

I would be inclined to agree with Grange also. However, Karongo has shown himself time and again to be very knowledgable on this area, so I await correction! But Grange's opinion seems logical to me.

[Grange]

You can only get relief for loans taken for a qualifying purpose

It is worth noting that even though the borrowing is apparently towards your new flat it is a qualifying purpose.

[Tax Accountant]

Firstly, Mr Grange states that the loan used for purchase of a property for owner occupation is for a 'qualifying purpose'. Surely he is not suggesting that tax relief is available on loans used to purchase a property for owner occupation?

Now I turn to the main issue. I note that both Mr Grange and John J disagree with my categorical reply. I am grateful to Mr Shed for his confidence in me.

I regret to note Mr Grange's comments that ''You should not be relying on hearsay from an internet chat room like this one for important issues like this one''. Which of my replies in the tax questions seems like idle gossip to Mr Grange?

Mr Grange also states that ''You should go to an accountant and get written advice from him''. I think that this is good advice and everyone should always seek paid professional advice before taking important decisions. This protects then should the advice turns out to be wrong or mis-conceived and they lose money as a result of it.

If the querist, or anyone else, wishes to retain my paid services, I am quite happy to repeat the same advice in writing and also quote chapter and verse.

Ramnik

[johne1234]

Karongo,

Obviously I hope that your answer is correct!

However, I'm sure you can appreciate I am trying to find a definitive answer to this question as it will make a huge difference to me financially, & the fact that several clearly well-informed people can't agree on this worries me a lot!

Is there some kind of legal text concerning this available (somewhere on the web maybe?) that I can look at for myself? Surely it must be possible to find out the answer to this question without having to pay an accountant?!

Many thanks,
John

PS. johnj - you mentioned you have a note on this subject - would it be possible for you to send this to me? (jpm227@hotmail.com) -thanks a lot!

[Grange]

Firstly, Mr Grange states that the loan used for purchase of a property for owner occupation is for a 'qualifying purpose'. Surely he is not suggesting that tax relief is available on loans used to purchase a property for owner occupation?


Because I use the word 'apparently'.

Querist could sell '1' and buy '2' for his own occupation. He obviously has to have a house in which to live.

However as he is keeping 1 and buying 2 as well, then the loan is actually to enable him to keep 1 - although it may look as though it is to buy 2.

I have no intention of engaging in mud slinging with Karongo who obviously wishes to have the last word!

[Tax Accountant]

Because I use the word 'apparently'.

Querist could sell '1' and buy '2' for his own occupation. He obviously has to have a house in which to live.

However as he is keeping 1 and buying 2 as well, then the loan is actually to enable him to keep 1 - although it may look as though it is to buy 2.

I have no intention of engaging in mud slinging with Karongo who obviously wishes to have the last word!

Mr Grange,

I don't understand your logic. The remortgage is undoubtedly for raising money towards the purchase of property 2 which is for own occupation. The loan is NOT to enable him to keep property 1 as you are trying to justfy. This logic defies gravity and one which no right minded professional will even try and put forward to the Inland Revenue. I am sure even the querist will see this.

However, as I have said before, there is no need to justify anything. The law clearly allows the owner of a house who has used it as only or main residence to move out, remortgage it upto its current value, let the house, use the remortgage advance money as deposit for his new residence or anything else that takes his fancy, and still get tax relief on the full loan interest on the remortgaged loan against his rental income.

First you liken this forum to a chat room. Now you say I am engaging in mud slinging and intent on having the last word! Look who is calling the kettle black! Could you please point out my exact reply where you think I have been mud-slinging? Your choice of words could seem insulting to other people and there is no need for this.

I will now address the querist.

John, you have lived in the house as your only or main residence. The taxman and all accountants thought until now that you could not remortgage the house and get tax relief on the interest if you used the advance for deposit on your new residence.

The thinking has changed over the last few months. The Inland Revenue has now admitted in writing to the whole wide world that in your circumstances, you could effectively pretend that you are selling the property at its market value to your own lettings business. Your lettings business is buying the property at the full market value from you. In doing so, your lettings business owes you the full market value. The lettings business could go out into the market place and mortgage the 'now to be let' property for upto its market value to pay to you the money it owes you for buying your property from you. Your lettings business will now be able to claim the full loan interest against its rental income.

Effectively, you can pretend that your lettings business is separate from you from the day you first introduce the property into your lettings business. If the lettings business is buying the property from you, it is entitled to borrow upto its full value and pay the money over to you for you to use it as you wish. Your lettings business is separate from you in respect of each of your properties from the day you introduce the properties to the lettings business.

Put it another way. If I bought the property from you with a 100% loan for my BTL business, would I not be able to claim interest on the full loan? And would I not give you the full value for you to use as you wish? It is no different when the so called buyer is your own lettings business.

I can hear others saying that all the above means nothing because you are not selling your property, your lettings business is not buying your property, and you and your lettings business are one and the same. This is what everyone, including the Inland Revenue were saying until a few months ago. Majority of accountants are not yet aware of the Inalnd Revenue's changed view on this subject. To those of you who are Accountants, think about a proprietors capital account on the Balance Sheet. Is it not common understanding that all interest on business borrowings is eligible as an expense so long as the proprietor's capital account remains in credit? Well here the position is the same. You have a lettings business (no different from a shop as an example). You introduce a property to the lettings business at a market value of say £250,000 (even if it cost you zilch 25 years ago and even if there is no mortgage thereon). Your lettings Balance Sheet will be Fixed Asset £250,000 and proprietor's capital account £250,000. The proprietor is now able to draw on this capital account, so long as he doesn't draw more than the available balance, and use the money however he likes. If he makes profits of £10,000 in the first year, he is entitled to draw not only his £250,000 capital but also his net profit of £10,000. It is upto its lettings business to worry about how it is going to finance the withdrawal of the proprietor's capital as and when he needs his money.

If I seem forceful, it is simply because I know as a matter of fact that my advice is correct and I don't want the querist to walk away with the wrong advice. It is just that others haven't yet caught up with the latest developements in this area. I myself found this out when someone else corrected me few months back.

I hope I have succeeded in convincing some of you, especially the querist.

Ramnik

[johne1234]

Karongo,
Thanks for this explanation, this is now a lot clearer to me.

However, one further question I hope you can answer....
Does my lettings business actually have to *buy* the property from me (& therefore have to pay stamp duty etc), or do I just have to *pretend* that my lettings business has bought the property?

If my lettings business is now the legal owner of the property, instead of me, would this involve any other kind of expense in order to transfer ownership from me to the lettings business?

Apologies if this is a stupid question, but I'm very new to this business.
Many thanks in advance,
John

[Grange]

>>The taxman and all accountants thought until now that you could not remortgage the house and get tax relief on the interest if you used the advance for deposit on your new residence.


Absolutely not true. At least one of the Big Four firms has advised its clients - and obtained the agreement of HMRC - for quite some years that remortgaging the house up to its original purchase cost would allow you to obtain tax relief on the interest.

Going back to my earlier point, without the existence of property 1 he would not have to have the extra loan! It is a strange sort of gravity that affects you, Karongo.*

I am very interested that you say the Inland Revenue's interpretation has changed. I am not aware that they had ever previously clarified their position so that it could change. Would you please be able to point us towards the relevant publication?

Finally, this is most certainly an internet chat room. It is on the internet, and anybody can post to it. It is not a gathering of professionals (although professionals may well gather here) with PII, the full facts of the case, engagement letters etc. etc. Only a fool would make investment decisions based on information garnered on the internet.
_______________________________________________

* Just to clarify the situation as it was before HMRC apparently changed the rules:

Imagine you bought '1' for 125k. It is now worth 175k, and you have no mortgage on it. You now want to buy '2' which will cost 225k.

Either you sell '1', take out a 50k mortgage and buy '2'.

Or you keep '1' and therefore have to take out a 225k mortgage; 125k finances your original BTL, and the other 100k finances '2'.

Or you sell '1', buy '2' and also buy for 175k '3' which is the same as '1' and you can obtain tax relief on the full 175k.

[Tax Accountant]

Karongo,
Thanks for this explanation, this is now a lot clearer to me.

However, one further question I hope you can answer....
Does my lettings business actually have to *buy* the property from me (& therefore have to pay stamp duty etc), or do I just have to *pretend* that my lettings business has bought the property?

If my lettings business is now the legal owner of the property, instead of me, would this involve any other kind of expense in order to transfer ownership from me to the lettings business?

Apologies if this is a stupid question, but I'm very new to this business.
Many thanks in advance,
John

Hi John,

It is always best to make absolutely sure and fully understand what you are doing, even at the risk of appearing to be asking trivial questions. Everything seems easy but only if you know the answers. Otherwise, nothing is trivial or easy. So don't feel embarassed to ask questions.

You are still the legal owner and you do not actually sell or transfer the property to your lettings business in a legal sense. All you are doing is to start treating the property as your lettings business property rather than your residence property. There are no costs or legalities involved at all. Comments about selling etc in the previous reply were merely to get my point across to you.

I will try and email you the relevant publications so that you could satisfy yourself that the position is as explained by me. It is difficult for you when you only have my word for it and there are others who expresss a completely opposite view.

Ramnik

[Tax Accountant]

GRANGE: At least one of the Big Four firms has advised its clients - and obtained the agreement of HMRC - for quite some years that remortgaging the house up to its original purchase cost would allow you to obtain tax relief on the interest.

REPLY: The above comments is at the heart of the point I have been trying to make for the last few days. HMR&C have now taken this a step further and stated that the restriction is not necessarily the original cost. They say the restriction under self assessment, where lettings is treated as a 'business', is the value of the property when you first start letting your property and not its historic cost if the property has not previously been used for letting.

GRANGE: This is most certainly an internet chat room. It is on the internet, and anybody can post to it. It is not a gathering of professionals (although professionals may well gather here) with PII, the full facts of the case, engagement letters etc. etc. Only a fool would make investment decisions based on information garnered on the internet.

REPLY: Just because anybody can post on it does not necessarily make a ''chat'' room. I didn't hear anyone talking about the weather, gardening, holidays, sports or engage in idle gossip. And nobody is advocating readers to make investment decisions based solely on information gathered on the internet. Readers are much more intelligent than some people give them credit. Most readers are happy to pick up free information from various sources before making final decisions and/or taking paid professional advice.

GRANGE: Imagine you bought '1' for 125k. It is now worth 175k, and you have no mortgage on it. You now want to buy '2' which will cost 225k and therefore have to take out a 225k mortgage; 125k finances your original BTL, and the other 100k finances '2'.

REPLY:You are buying property 2 for 225K by taking a mortgage for 225K. In my books, this means that the whole borrowings of 225K has financed the purchase of property 2. I do not agree that you can pretend that 125K of this has financed your original BTL property 1.
Whether the interest, on 125K or the whole of 225K or any other figure in between, is eligible for deduction as an expense against rental income is another issue.

Ramnik

[Tax Accountant]

TO JOHNE1234:

I have now emailed to you the authoratitive tax article setting out the full details. Please feel free to let me know if you still have any doubts or concerns.

TO ALL OTHERS:

Refer to Inland Revenue's Business Income Manual paragraph 45700.

FROM RAMNIK

[Grange]

GRANGE: At least one of the Big Four firms has advised its clients - and obtained the agreement of HMRC - for quite some years that remortgaging the house up to its original purchase cost would allow you to obtain tax relief on the interest.

REPLY: The above comments is at the heart of the point I have been trying to make for the last few days. HMR&C have now taken this a step further and stated that the restriction is not necessarily the original cost.

I hate to be pedantic, but that is the opposite to what you have been saying. What you said was 'The taxman and all accountants thought until now that you could not remortgage the house and get tax relief on the interest if you used the advance for deposit on your new residence.' The above comment (sic) is in direct contradiction to your observation.

Anyway, thank you for the interesting reference to the business income manual. In the interests of sharing this information with other interested readers, this is the link an interested reader will require. http://www.hmrc.gov.uk/manuals/bimmanual/BIM45700.htm

More interestingly, this applies to all borrowings since the introduction of 'new' Schedule A. So it may be possible to revist tax returns since 1995.

[Tax Accountant]

GRANGE: I hate to be pedantic, but that is the opposite to what you have been saying. What you said was 'The taxman and all accountants thought until now that you could not remortgage the house and get tax relief on the interest if you used the advance for deposit on your new residence.' The above comment (sic) is in direct contradiction to your observation.

REPLY: :mad: You are not only pedantic but also still wrong. It is not the opposite of what I have been saying. You are distorting comments out of context. Your comments about one of the big 4 accountancy firms was saying that you could only get interest relief on loans upto the original purchase cost. I have been trying to bang my head against 'brick walls' and actually saying that you could get tax relief on the loan upto its current market value when the property first entered the lettings business. And only Mr Shed had the decency of giving any resemblance of credit to my numerous posts in this forum. All you could muster is to try and distract from the point at issue rather than admit that your advice was wrong and I was right all along.



GRANGE: Anyway, thank you for the interesting reference to the business income manual. In the interests of sharing this information with other interested readers, this is the link an interested reader will require. http://www.hmrc.gov.uk/manuals/bimmanual/BIM45700.htm

REPLY:
Even the 'thank you' has to be pre-fixed with 'anyway', as if it is forced out only grudgingly and an after thought. The reference to official material to prove my point is said to be only 'interesting'. Is this all it is to you, only interesting ? DO YOU HAVE THE GRACE TO ADMIT THAT YOU AND OTHERS WERE WRONG ALL THE TIME AND MY ADVICE WAS CORRECT?



GRANGE: More interestingly, this applies to all borrowings since the introduction of 'new' Schedule A. So it may be possible to revist tax returns since 1995.

REPLY: As Mr Shed asked me earlier in this query, what is your profession Mr Grange? If you are in Accountancy business, will you be needing to revisit your clients' tax returns since 1995 and perhaps even checking up on your PI policy?



TO ALL OTHER READERS: I regret the style and tone of this reply. This is not my normal style as all of you will be able to verify from enormous number of contributions to the tax queries in this forum. This rather unpleasant and strong reply has been forced upon me by the style of Mr Grange's replies time and again in this query right until the end. Is it the end though?


Ramnik

[johne1234]

Ramnik,
Thankyou for the email - much appreciated.
John

[Grange]

Deary me, we have lost our little temper, haven't we. Perhaps I'd better summarise:

1. Karongo has been advising his clients for many years that it was not possible to obtain any interest relief in the event of remortgaging a rental property.

2. My own position was that it was possible to obtain tax relief for interest on a loan up to the original cost of the property - no matter how the money has instead been spent.

3a. The Inland Revenue published their interpretation of the law in September 2004. Please remember that it is only that - an interpretation. It is perfectly possible for the courts to challenge that interpretation.

3b. The new interpretation is that it is possible to remortgage up to the value of the property when it was first let.

If I were in the accounting business then I would be less likely to have to revisit my returns than would Karongo.

Anyway, it is most certainly an interesting development in tax law - would you like me to send you a bunch of flowers as well, Karongo? @>---+-- Yes, I agree that after you were introduced to that piece of information you have been applying the law more correctly than I would have been. However, prior to then you were not! Score 1-1.

Happy, old chum?

[Tax Accountant]

Nothing further to add.
Ramnik

[Tax Accountant]

I see that someone has posted a 5* rating to this thread.

It would be interesting to know who has posted this and why.

Ramnik

[johnj]

My offer of a pack of material on interest relief remains open, if anyone wants me to prepare one.

[johnj]

Thank you Grange

My offer of a pack of material on interest relief, if anyone wants me to prepare one, also remains open.

[Tax Accountant]

My offer of a pack of material on interest relief remains open, if anyone wants me to prepare one.

What is this offer and where is it?
Ramnik

[Tax Accountant]

I have brought this thread back into play so as to enable me to refer to it with ease in answer to another question.

Ramnik

[maaz-man]

Ramnik

Well done - you have brought a very valuable thread to life - not easy to find pearls buried in the depth of archives ;)

The question of interest costs is now laid to rest (i think). I have seen questions about the other leagal costs and lenders charges in raising funds on prop1 to buy prop2, but havent seen any conclusive answers?

It will be great if you can give any views or old posts :D

Cheers
maaz

[Tax Accountant]

Ramnik

Well done - you have brought a very valuable thread to life - not easy to find pearls buried in the depth of archives ;)

The question of interest costs is now laid to rest (i think). I have seen questions about the other leagal costs and lenders charges in raising funds on prop1 to buy prop2, but havent seen any conclusive answers?

It will be great if you can give any views or old posts :D

Cheers
maaz

Raise your specific query on a new thread and I will try and answer this as soon as I can.

Ramnik

[Tax Accountant]

Bringing thread back to life.

Ramnik

[Tax Accountant]

Just thought it better to bring this thread back to life again.

Ramnik