remotgaging- what money can be used for

[liza]

I am looking to remortgage my buy to let property soon, and release some money which i would like to use for building an extension on my own home (ppr), but im not sure if the money on the intrest payments is tax deductable since its not an improvememt to the buy to let property. if not is it a better idea to use the released money as a deposit for another buy to let? any help please.

[Poppy]

You can offset the BTL mortgage interest payments against your tax, because it is an expense of your BTL business.

What you do with the loan funds is up to you. You can (as you suggest) build an extension on a completely different property; use it as a deposit; blow it all in Vegas. I personally would go shopping with it…

[Tax Accountant]

I am looking to remortgage my buy to let property soon, and release some money which i would like to use for building an extension on my own home (ppr), but im not sure if the money on the intrest payments is tax deductable since its not an improvememt to the buy to let property. if not is it a better idea to use the released money as a deposit for another buy to let? any help please.

You can release as much as you like if you use the money to improve a let property or to buy another let property.

However, if you wish to use the money for ANY PERSONAL use (such as holiday or improve home etc), you can remortgage the let property UPTO it's value at the date when it first entered your lettings business, effevtively the date when it was first let. If it was bought and used for letting from the beginning, you can only remortgage upto the original cost price.

You may be able to borrow at cheaper rate on your home but then you will not get the tax relief. Therefore, you need to weigh up the cheaper mortgage against the tax relief and see which works out better.

Whether you use the remortgage advance for your home improvements or to use as deposit for another buy to let is something for you to decide.

Does this help?

Ramnik

[Tweedle Dum]

Could you use the released money for personal use if the deposit was funded from remortgaging another BTL? I would have thought this route only applied if the deposit was funded from your own savings.

[slade]

I've a similar problem. I can raise £25K on a remortgage of existing BTL. I will put it on deposit until I find a property. Can I charge the net outgoing interest against tax? It is intended to be mostly deployed to fund the deposit on a new property, and pay the legals, etc.

ps Should I buy through a company, as I intend to keep this going for atleast 10 properties.

[Tax Accountant]

Could you use the released money for personal use if the deposit was funded from remortgaging another BTL? I would have thought this route only applied if the deposit was funded from your own savings.

The answer is in my reply above.

For the interest to qualify as an expense, the total loan should be below the value of the property at the date the property entered the lettings business.

Ramnik

[Tax Accountant]

I've a similar problem. I can raise £25K on a remortgage of existing BTL. I will put it on deposit until I find a property. Can I charge the net outgoing interest against tax? It is intended to be mostly deployed to fund the deposit on a new property, and pay the legals, etc.

ps Should I buy through a company, as I intend to keep this going for atleast 10 properties.

Again, the answer depends on whether the interest qualifies for tax relief in the first place. For the interest to qualify as an expense, the total loan should be below the value of the property at the date the property entered the lettings business.

As to whether to buy through a company, the answer is not straight forward.

Very rough answer is that it is normally better for Income Tax purposes for those who are higher rate taxpayers. However, it is generally dis-advantageous for Capital Gains Tax purposes due to the loss of taper relief (indexation is a poor substitute for this), loss of possible PPR and lettings relief, and loss of annual exemption.

Ramnik

[slade]

Thanks for the reply -
So even though the Intended Use of the "Extended Mortgage" is to serve as a deposit for a new BTL the interest payable will not be "off-setable" against the total rental pool for the year. (I've delayed the re-mortgage so it will fall in the new tax year and I won't hang around too long before using it for property 2 & 3).

As for using a company, I was considering "selling" my first BTL to the company (at it's market value) soon. Thereby drawing a line under a £25K gain and using my (& spouse) CG allowances. This would raise the base value so should the Company sell it in future there would be sufficient equity to pay the taxman, and for the company to bank the surplus until I retire.

This time next year I would be thinking about transferring one or borh of the other properties into the company, thus realising a further gain, etc, etc.

I may be barking up the wrong tree here but I'd appreciate someone setting me straight if I am........ Ray

[Tax Accountant]

Thanks for the reply -

So even though the Intended Use of the "Extended Mortgage" is to serve as a deposit for a new BTL the interest payable will not be "off-setable" against the total rental pool for the year. (I've delayed the re-mortgage so it will fall in the new tax year and I won't hang around too long before using it for property 2 & 3).

As for using a company, I was considering "selling" my first BTL to the company (at it's market value) soon. Thereby drawing a line under a £25K gain and using my (& spouse) CG allowances. This would raise the base value so should the Company sell it in future there would be sufficient equity to pay the taxman, and for the company to bank the surplus until I retire.

This time next year I would be thinking about transferring one or borh of the other properties into the company, thus realising a further gain, etc, etc.

I may be barking up the wrong tree here but I'd appreciate someone setting me straight if I am........ Ray

I did not say that the interest is not an eligible expense. It depends on the value of the property at the date it entered the lettings business and whether your remortgage total is more or less than this.

Regarding selling to the company, this has to be at market value as it is a transaction between ''connected persons''. You can do as you suggest; your thinking is correct in covering the exposed gains to-date by annual allowances. However, your company will not be able to claim annual allowance or taper relief (40% after 10 years ownership) if and when it wishes to sell the property in the future.

Ramnik

[slade]

Thanks for the opinion. My reply was a bit tongue in cheek.
This is how I see it. The extra cash to be borrowed is all above the oiginal purchase price of the BTL - so it should NOT be off-set against rental income, which is why I'll keep it "on ice" in a deposit account. However as soon as I buy a 2nd BTL property I will defrost it for use as a deposit, and so it can be employed from that date "in the business", together with the remaining (80% or so) main mortgage. The shorter the chill period, the less it costs me.

The second part of your answer relating to use of a company has raised something I have not fully explored - selling the property. However, if I sold the company itself (or shares in it), I think I can use the annual CG allowances and taper relief. Your prompting has however caused me to consider a case where I could conceivably need to divest some of the properties in the portfolio which will bear further research on my part. :rolleyes:
I really do thank you for your input, Ramnik- 2 CA's & 1 FA backed off when I asked them a similar question (and one of the CA's has his own investment company!).
Ray

[Tax Accountant]

Thanks for the opinion. My reply was a bit tongue in cheek.
This is how I see it. The extra cash to be borrowed is all above the oiginal purchase price of the BTL - so it should NOT be off-set against rental income, which is why I'll keep it "on ice" in a deposit account. However as soon as I buy a 2nd BTL property I will defrost it for use as a deposit, and so it can be employed from that date "in the business", together with the remaining (80% or so) main mortgage. The shorter the chill period, the less it costs me.

The second part of your answer relating to use of a company has raised something I have not fully explored - selling the property. However, if I sold the company itself (or shares in it), I think I can use the annual CG allowances and taper relief. Your prompting has however caused me to consider a case where I could conceivably need to divest some of the properties in the portfolio which will bear further research on my part. :rolleyes:
I really do thank you for your input, Ramnik- 2 CA's & 1 FA backed off when I asked them a similar question (and one of the CA's has his own investment company!).
Ray


You are welcome.

Ramnik

[liza]

You can release as much as you like if you use the money to improve a let property or to buy another let property.

However, if you wish to use the money for ANY PERSONAL use (such as holiday or improve home etc), you can remortgage the let property UPTO it's value at the date when it first entered your lettings business, effevtively the date when it was first let. If it was bought and used for letting from the beginning, you can only remortgage upto the original cost price.

You may be able to borrow at cheaper rate on your home but then you will not get the tax relief. Therefore, you need to weigh up the cheaper mortgage against the tax relief and see which works out better.

Whether you use the remortgage advance for your home improvements or to use as deposit for another buy to let is something for you to decide.

Does this help?

Ramnik

Thanks for the reply. So just to clarify, as long as the money released from the buy to let is below the value of the date it was first let, then the new loan interest payments, can be classed as an expense and be offset against rental income?

e.g the property was valued at 100k at the start of letting, and the motgage was 45k when i purchased it 5 years ago (lived in it for 5 1/2 years) so i can release upto 55k?

[Tax Accountant]

Thanks for the reply. So just to clarify, as long as the money released from the buy to let is below the value of the date it was first let, then the new loan interest payments, can be classed as an expense and be offset against rental income?

e.g the property was valued at 100k at the start of letting, and the motgage was 45k when i purchased it 5 years ago (lived in it for 5 1/2 years) so i can release upto 55k?

Assuming this is your only let property, you can borrow upto a total of £100,000 on this same property. All the interest will be deductible against the rental income from the property.

Therefore, if the present mortgage is £45,000, you could release £55,000 and use it for any personal purpose. Any borrowing in excess of the £100,000 will need to be used for lettings business such as improvements to your let property or to use as a deposit for purchase of anpther let property. Otherwise the interest on the excess loan will not be an eligible expense of your lettings business.

Is this clear?

Ramnik