B.I.M.45700- tax treatment of mortgage interest

[johnjw]

Earlier recent threads have pointed out that under the terms of the IR business income manual 45700 the owner of a rental property should be free to raise a mortgage on the security of the property, up to the value of the property and charge the interest paid, against the rental income received. For example, someone may have acquired a mortgage-free property through inheritance or they may have owned a property without mortgage for many years. Say the property is worth £100K. They decide to go into the letting business. They raise a mortgage of say £80K and within this, spend say £20K of the mortgage monies on repairs/renovations, to make the property suitable for letting.
Reading of BIM45700 and recent Landlordzone threads on this subject would lead me to expect that the interest paid on the £80K mortgage (about £4000 pa) could all be set against rental income.
However, I recently put the question to the Inland Revenue help-desk and after a long delay, I received an answer which included " - interest on an overdraft which has been used for the repair or improvement of a let property is allowable as a deduction against rental income. If you transfer this overdraft into a loan you will be able to claim tax relief on the interest payable on the original £20K. There will be no tax relief on the additional sum borrowed".
This answer seems to be out-of-line with the examples quoted in BIM45700 and in this forum. However, how do you conduct an argument with the Inland Revenue?

[Tax Accountant]

Earlier recent threads have pointed out that under the terms of the IR business income manual 45700 the owner of a rental property should be free to raise a mortgage on the security of the property, up to the value of the property and charge the interest paid, against the rental income received. For example, someone may have acquired a mortgage-free property through inheritance or they may have owned a property without mortgage for many years. Say the property is worth £100K. They decide to go into the letting business. They raise a mortgage of say £80K and within this, spend say £20K of the mortgage monies on repairs/renovations, to make the property suitable for letting.
Reading of BIM45700 and recent Landlordzone threads on this subject would lead me to expect that the interest paid on the £80K mortgage (about £4000 pa) could all be set against rental income.
However, I recently put the question to the Inland Revenue help-desk and after a long delay, I received an answer which included " - interest on an overdraft which has been used for the repair or improvement of a let property is allowable as a deduction against rental income. If you transfer this overdraft into a loan you will be able to claim tax relief on the interest payable on the original £20K. There will be no tax relief on the additional sum borrowed".
This answer seems to be out-of-line with the examples quoted in BIM45700 and in this forum. However, how do you conduct an argument with the Inland Revenue?

BIM45700 is quite clear. You don't need anythink more clearer or firmer.

It is not uncommon for helpline staff not to get it right all the time. It is also possible, and probable, that the question and/or answer is not fully understood.

Also the issue in point is still not widely known or understood by many Tax Officers, Accountants and taxpayers.

Under self-assessment, the onus is on the taxpayer to complete his/her tax returns as he/she thinks fit. If you have any concerns, you could use the ''additional information'' boxes on the tax return to clarify any issues. If the tax inspector does not issue an enquiry notice within 12 months of the filing deadline (22 months after the tax year end), then the issue is closed. If an enquiry notice is issued, you simply have to quote the BIM 45700.

Ramnik

[johnjw]

Ramnik,
Thanks for your reply. It is next years Tax Return which will be affected and I'll certainly use the additional info. box as you suggest.
John

[Tax Accountant]

Ramnik,
Thanks for your reply. It is next years Tax Return which will be affected and I'll certainly use the additional info. box as you suggest.
John
You are welcome, John J W.

Just to recap, interest on a loan is an allowable deduction against rental income, provided the loan is secured on the let property itself, upto a maximum of the value of the property at the time it enters the letting business. This normally means the value when it is first available for letting. Money raised from re-mortgaging could be used for ANY purpose.

It goes without saying that interest on existing loans is allowed as a deduction against rental income.

Once a property enters a letting business (this is what letting is called), properties are sometimes remortgaged to raise additional funds. In this case, interest on the loan in excess of the value at the date it first entered the lettings business can only be claimed if the excess loan has been used for a qualifying purpose. This is normally to replace other qualifying loans, for expenditure or improvement of let properties or towards purchase price of new properties for letting.

In a letting business, it is not necessary to keep each rental property's rent and expense separately from each other. They are all effectively pooled together and reported in a self-assessment tax return all together as if they were all just one property. Therefore, effectively, any losses on some properties get used up against profits on other properties in the same year. However, if there is an overall loss, the loss can only be relieved by carrying forward and using against first available profits in later years.

Ramnik