BTL mortgage interest deductible?

[laperla]

I already have a house that is my family home.

I am in the process of buying an apartment to rent out as a long term investment.

For simplicity I'll keep the figures straight forward... If my monthly costs for the property add up to £1000 for interest only mortgage, insurance, agencies fee's etc and my rental income amounts to £1000 per month does this mean I have no tax to pay? In theory.

The reason I'm asking is that I moved abroad for a few years and rented out my family home (almost breaking even on costs and income) and when I came back my accountant said I needed to pay tax on all the income and I couldn't deduct the mortage payments even though they were interest only. I queried it with him and he asked someone else and it was decided that his initial advice was wrong and I could subtract one from the other. It was still a worrying few weeks though whilst he confirmed it!

So thats why I'd like some simple advice on this buy to let situation.

Thanks

[Editor]

Yes you can deduct interest from your income and if you are in a loss situation this can be off-set against income from other properties or carried forward to subsequent years.

See: http://www.hmrc.gov.uk/manuals/pimmanual/index.htm

"Interest payable on loans used to buy land or property which is used in the rental business, or on loans to fund repairs, improvements or alterations, is deductible in computing the profits or losses of the rental business in the same way as other expenses."

[Taxation Solutions]

Laperla

Basically you take your yearly rental income minus your yearly tax allowable expenses to arrive at your rental profit or loss. Mortgage interest, agent's fees, insurance, ground rent etc are tax allowable expenses.

Any losses you make can only be offset against other rental profits or carried forward against future UK rental profits. The losses can't be offset against your other UK income e.g. salary or any overseas rental income for example.

Jason
www.propertytaxation.co.uk

[arealhighlander]

Wonder if I can add a follow on question to this thread?

I already own a second home which I am renting out. I have no mortgage.

Would it be possible for me to take out an interest only mortgage on the house (maybe about 50% of its value), invest the mortgage money elsewhere (buy more property or stocks/shares etc.) and use the interest payments to offset the amount of tax I have to pay on the income.

Or can you only do this if the money from the mortgage is used to buy or otherwise spend on the property being rented?

[Tax Accountant]

Wonder if I can add a follow on question to this thread?

I already own a second home which I am renting out. I have no mortgage.

Would it be possible for me to take out an interest only mortgage on the house (maybe about 50% of its value), invest the mortgage money elsewhere (buy more property or stocks/shares etc.) and use the interest payments to offset the amount of tax I have to pay on the income.

Or can you only do this if the money from the mortgage is used to buy or otherwise spend on the property being rented?

There are two aspects to your query.

(1) You can borrow on the security of the let property so long as the loan does not exceed the value at the date when the lettings commenced. If so, the loan interest will be eligible to reduce the rental profits.

(2) Any eligible loan interest (or any other eligible lettings expense) only serves to reduce the lettings profit and not the amount of tax itself.

Ramnik

[arealhighlander]

Ramnik,

many thanks for the reply.

I understand that it would be an allowable expense, reducing the profit and hence the tax, as opposed to the tax itself.

I was concerned that because I already owned the property, any mortgage taken out would only qualify as an expense if it wa sto be spent on the property.

As Editor quoted "Interest payable on loans used to buy land or property which is used in the rental business, or on loans to fund repairs, improvements or alterations, is deductible in computing the profits or losses of the rental business in the same way as other expenses."

I am not going to be spending the money on buying or funding repairs/improvements. So was concerned that it might not be an allowable expense.

[Tax Accountant]

Ramnik,

many thanks for the reply.

I understand that it would be an allowable expense, reducing the profit and hence the tax, as opposed to the tax itself.

I was concerned that because I already owned the property, any mortgage taken out would only qualify as an expense if it wa sto be spent on the property.

As Editor quoted "Interest payable on loans used to buy land or property which is used in the rental business, or on loans to fund repairs, improvements or alterations, is deductible in computing the profits or losses of the rental business in the same way as other expenses."

I am not going to be spending the money on buying or funding repairs/improvements. So was concerned that it might not be an allowable expense.

Hi,

The reply by Editor was a quote from the Tax Office website and addresses the point in a limited context. This only deals with the property which has been used in your lettings business from the beginning.

I reiterate my reply above ie: ''You can borrow on the security of the let property so long as the loan does not exceed the value at the date when the lettings commenced. If so, the loan interest will be eligible to reduce the rental profits.''

For example, you may have bought the property 10 years ago costing £50,000 and used it as your residence until say 2004 when you moved to another property. The value of the 1st property at that time is £150,000 and you started to let the property. In this case, you will be allowed to borrow upto £150,000 on the security of the 1st property (the let property) and all the interest will be eligible for deduction in your lettings business regardless of how you use the money.

Let us extend the example above to present time when the value is say £190,000. In this case, any borrowings in excess of the £150,000 has to be used for improvement or purchase of of let properties for the interest to qualify for deduction.

Does this now make things clearer?

You should also look up the extensive discussion on this very subject some months ago on a separate thread.

Ramnik