Interest payments as allowable expenses(2)

[johnjw]

My question has some similarities to that of similar title, posed by johne1234 and answered interestingly but without consensus by Karongo and others.
During the past few months I have carried out work on a house to prepare it for letting. I have owned the house for several years but up to a few months ago it was occupied rent-free by a member of my family. I have spent about £20000 on repairs and renovation. The source of the money is partly savings partly overdraft. I now wish to take out a formal loan for £20000 and my question is; can I charge the interest on this loan against rental income. I have receipts for materials and labour involved in the renovations. The property is now let but all the renovation expenditure and rental income will fall in the current tax year. I do realise that I can't charge the cost of the repairs/renovations against the rental income since they were done to start what is effectively a new business but what about the loan interest? Would the fact that the loan is being set up retrospectively, prevent the interest from being charged against rental income?

[Tax Accountant]

My question has some similarities to that of similar title, posed by johne1234 and answered interestingly but without consensus by Karongo and others.
During the past few months I have carried out work on a house to prepare it for letting. I have owned the house for several years but up to a few months ago it was occupied rent-free by a member of my family. I have spent about £20000 on repairs and renovation. The source of the money is partly savings partly overdraft. I now wish to take out a formal loan for £20000 and my question is; can I charge the interest on this loan against rental income. I have receipts for materials and labour involved in the renovations. The property is now let but all the renovation expenditure and rental income will fall in the current tax year. I do realise that I can't charge the cost of the repairs/renovations against the rental income since they were done to start what is effectively a new business but what about the loan interest? Would the fact that the loan is being set up retrospectively, prevent the interest from being charged against rental income?

JOHN JW,

First of all, referring to your opening sentence, is there anyone now still disputing my advice to John 1234, ie that one can get tax relief on a loan upto the value of the property at the date it is first introduced into the lettings business? I don't think so.

There are a lot of different issues involved in your query. You say you have owned the property for several years. I will assume that you have occupied the house as your only or main residence. Occupation rent-free by members of your family during the last few months could be ignored for this purpose, although this period may not count towards your PPR relief if and when you come around to selling.

You say that you have spent £20,000 on repairs and renovations. None of this expense is eligible as a deduction from your rental income as it has been incurred prior to starting your lettings business. However, any improvement expenditure included in this could be capitalised and count as additional cost of the property and included in the calculation of CGT if and when you come around to selling.

You wish to take out a formal loan of £20,000 to cover the money spent on repairs and renovations. You do not say whether you already have any other loans or mortgages on the property. I would say that you can borrow as much as you like upto the value of the property when you first start letting it and you will be able to claim the interest on this loan against your rental income. It does not matter that you are taking out the loan after having spent the money from your own resources in the first place. So, if the value of the property at the date when lettings commenced is say £125,000, you could have loans totalling upto £125,000 (including any existing loan on the property) and still obtain tax relief on the interest on full amount.

Is this clear and does it answer your question?

Ramnik

[johnjw]

Thank you Ramnik. Your advice is very clear and confirms what I hoped would be the case. I hadn't seen the concluding posts for johne1234 when I wrote my question. There does now seem to be agreement there.
I dont think the detailed background will make a difference to the advice but just in case, I'll fill in a few details: I've owned the property for 20 years. I paid off the mortgage 5 years ago. I've never lived in the property and it has been occupied by my late parents throughout the 20 years and up to a few months ago.
My worry was that raising a loan now, on pre-owned assets and charging the loan interest against rental income might not be allowed. Unless the background given above makes a difference, I now understand that I could borrow not only the £20K for repair/renovation but an amount equal to the value of the property at the time I started renting and charge the loan interest against rent.
Thanks again,
John

[Tax Accountant]

As far as I am aware, it does not matter that you were not living in your property so long as it was not used in your lettings business until now.

However, please bear in mind that this new interpretation of allowing loan interest is still not widely known, not even to most accountants. Therefore, all the nitty gritty may not yet have been ironed out. Having said this, I don't know of any reason why you cannot get the tax relief as described previously.

Ramnik

[johnjw]

To Ramnik Karongo
Thank you very much for your further response.
I think the new interpretation on allowing loan interest will be important to many BTL landlords. Just one further point if I may. Is it important that the loan taken out is specifically against the security of the property concerned?
In my case, I have another business (not BTL) with a relatively small mortgage and it would be cheaper to add £20K to this existing mortgage rather than set up a new mortgage on a different security. The interest payment could easily be split between the two businesses when the accounts are prepared - but would this be acceptable practice?

[Tax Accountant]

To Ramnik Karongo

Thank you very much for your further response.

I think the new interpretation on allowing loan interest will be important to many BTL landlords. Just one further point if I may. Is it important that the loan taken out is specifically against the security of the property concerned?
In my case, I have another business (not BTL) with a relatively small mortgage and it would be cheaper to add £20K to this existing mortgage rather than set up a new mortgage on a different security. The interest payment could easily be split between the two businesses when the accounts are prepared - but would this be acceptable practice?

Hi John,

As far as I am aware, the mortgage must be secured against the security of the property itself if you wish to take advantage of borrowing upto the market value of that property at the date when it was first introduced into your lettings business.

Again, as far as I am aware, if you borrow against the security of your residential or any other non-BTL property, the interest would qualify only if the loan proceeds were used for a qualifying purpose for your BTL business, eg, to improve or to buy another BTL property.

If you have never occupied the proposed BTL property as your only or main residence, you should consider if it is possible to occupy same as your only or main residence, by nomination as your 2nd residence if necessary, subject to satisfying the various conditions. If you are able to do this, you will secure substantial reliefs against CGT liability if and when you sell the property.

Ramnik

[johnjw]

Hello Ramnik,
Thanks for your useful reply - much appreciated.
John

[Tax Accountant]

Hello Ramnik,
Thanks for your useful reply - much appreciated.
John

Glad to have been of assistance.

Ramnik