Interest on deposit finance tax deductible?

[smarriott]

I took a 50K advance on my principal private residence to fund the deposit on a buy to let.

I have telephoned HMRC to establish whether the interest charged on this loan is tax deductible and was advised it is not. I was informed only interest on the mortgage secured on the buy to let property is tax deductible.

I have since found several articles stating the opposite, interest on the deposit loan can be offset.

Can anyone offer any clarity on this point?

Thanks

[King_Maker]

The person who you spoke to at HMRC is wrong.

Where there is mortgage involved, it is not relevant which property it is secured against (or whether it is secured at all), but the purpose of the loan. If it is to purchase a rental property or to fund improvements etc, then the interest can be deducted from rental profits.

[TaxationPete]

What was the declared purpose of the 'advance'. Regards Peter

[smarriott]

I informed the HMRC advisor the advance against my PPR was for the deposit on the BTL investment. I have found this quote which seems to explain why HMRC might not allow this:

This falls under the “purpose of loan rules”. Although the loan will be financed on another property, as it will be used wholly and exclusively to fund the ‘buy to let’ property, it is an allowable deduction in tax terms, when establishing the net profit from renting the property.

However, you can only claim a deduction for the amount of “qualifying interest” which applies to the rental property. Any interest payable on your existing residence is not deductible against the profits from the rental property.

The above extract was taken from here:

http://www.taxassist.co.uk/QuestionsAndAnswers/november2005.php

Thanks for your replies, still no clearer.

I have an 'HMRC expert' calling me back in 48h to discuss, hopefully he/she will be able to give me a solid answer.

[TaxationPete]

What do you not understand from that statement. It details that as long as the loan is wholly and exclusively for the acquisition of the B2L and if the declared purpose of the loan then 'all' interest pertaining to that loan IS deductible against the revenue generated. Any equity raised that is not associated to the B2L is not deductible, i.e. the world cruise you chucked in. Regards Peter

[King_Maker]

I informed the HMRC advisor the advance against my PPR was for the deposit on the BTL investment. I have found this quote which seems to explain why HMRC might not allow this:

This falls under the “purpose of loan rules”. Although the loan will be financed on another property, as it will be used wholly and exclusively to fund the ‘buy to let’ property, it is an allowable deduction in tax terms, when establishing the net profit from renting the property.

However, you can only claim a deduction for the amount of “qualifying interest” which applies to the rental property. Any interest payable on your existing residence is not deductible against the profits from the rental property.

The above extract was taken from here:

http://www.taxassist.co.uk/QuestionsAndAnswers/november2005.php

Thanks for your replies, still no clearer.

I have an 'HMRC expert' calling me back in 48h to discuss, hopefully he/she will be able to give me a solid answer.

I suspect what you have overlooked is the example refers to a "mixed" loan - namely a loan to buy a PPR and a further advance/re-mortgage to fund a BTL. Only the interest applicable to the BTL is deductible, the PPR remains non-deductible.

[smarriott]

Thanks for your responses, sounds like I can further reduce my tax burden by ofsetting the interest on the deposit advance, splendid.

To add a slight complexity to add to this situation, what happens if I sell my PPR, move into rented acommodation for 6 months and then jump back into the market again?

The additional £50K advance that funded the BTL deposit has now been repaid, and clearly I cannot claim any interest on this amount. But can I offeset £50K's worth of interest on any new mortgage against my BTL profit?

[King_Maker]

Thanks for your responses, sounds like I can further reduce my tax burden by ofsetting the interest on the deposit advance, splendid.

To add a slight complexity to add to this situation, what happens if I sell my PPR, move into rented acommodation for 6 months and then jump back into the market again?

The additional £50K advance that funded the BTL deposit has now been repaid, and clearly I cannot claim any interest on this amount. But can I offeset £50K's worth of interest on any new mortgage against my BTL profit?

Yes, if the loan is to re-finance your Capital Account of the rental business.

The maximum amount of the loan would be limited to its purchase price or market value at the time the property was introduced into the Letting business.

An example (Example 2) is given in the Inland Revenue's Business Income Manual at section 45700 :

http://www.hmrc.gov.uk/manuals/bimmanual/BIM45700.htm