Re-mortgage interest allowable?

[spitfirepilot]

I've read the long thread on this with interest and am comfortable with everything except a timing issue. We bought a property with a £65k mortgage some years ago and extended that to £135k to fund an overseas purchase. We then moved out in 2005 and let it on a casual basis (to friends) but made a return to the IR, claiming interest expense only on the original £65k mortgage. We are about to transfer the total £135k personal mortgage into a buy to let mortgage and let commercially. Can we now claim the £135k interest payments or must that be done when we first start letting? Any advice gratefully recieved.

[Tax Accountant]

I've read the long thread on this with interest and am comfortable with everything except a timing issue. We bought a property with a £65k mortgage some years ago and extended that to £135k to fund an overseas purchase. We then moved out in 2005 and let it on a casual basis (to friends) but made a return to the IR, claiming interest expense only on the original £65k mortgage. We are about to transfer the total £135k personal mortgage into a buy to let mortgage and let commercially. Can we now claim the £135k interest payments or must that be done when we first start letting? Any advice gratefully recieved.

I am not sure if I quite understand your last sentence. Interest could only be claimed from the date when the property has entered into your lettings business. This is not necessarily the date when the tenancy has commenced.

You must first identify the date when the property is introduced into your lettings business. This could be the date when the property is first let or the date when you renovate it to get it ready for letting. Then you need to determine the value of the house at that date. Any amount of the mortgage upto this valuation will be eligible for claiming against rental income.

It would seem to me that the full amount of the loan of £135,000 will qualify for deducting interest from the rental income on the basis that the property was worth at least that amount when you moved out of the property.

Does this answer your query?

Ramnik

[spitfirepilot]

Thanks Ramnik,
We started letting mid year 2004 and at that time the mortgage secured on the property was £135k. We were advised by the revenue over the phone that we could claim only interest expense on the original mortage taken out to fund the property purchase in 1995 (i.e.£65k). This is what we claimed in our self assessment for 2004/5.
It now appears that this advice was incorrect and we could claim for the full £135k being the outstanding mortgage at the time the letting of the property became a business for tax purposes.
What are our chances of making a correction to our 2004/5 return?
Thanks again, you are a great source of advice/help

[Tax Accountant]

Thanks Ramnik,
We started letting mid year 2004 and at that time the mortgage secured on the property was £135k. We were advised by the revenue over the phone that we could claim only interest expense on the original mortage taken out to fund the property purchase in 1995 (i.e.£65k). This is what we claimed in our self assessment for 2004/5.
It now appears that this advice was incorrect and we could claim for the full £135k being the outstanding mortgage at the time the letting of the property became a business for tax purposes.
What are our chances of making a correction to our 2004/5 return?
Thanks again, you are a great source of advice/help

It is a fact that you are eligible to claim the interest on the full mortgage and you are free to make an amendment to your 2004-05 tax return upto 31 January 2007. The Inland Revenue have no choice in the matter but to issue the revised calculations. However, you should be aware that this may bring your file under the spotlight and therefore may result in being scrutinised more closely than would be the case otherwise.

I suggest that you should write a short letter along the following lines:

'' I / We refer to the SA Tax Return for the year 2004-05 and now wish to make an amendment to the loan interest claimed in the Land & Property pages. I / We claimed the loan interest on the original house purchase loan as advised by the Inland Revenue office in a telephone call to your helpline. However, I / we now understand that the full amount of the mortgage secured on the let property upto its value in June 2004, when it entered the lettings business, is a qualifying loan. Accordingly, I / We attach a revised Land & Property page to reflect the amendments required. For your assistance, I / we also attach a letter / certificate from the lender to confirm the amount of the interest now being claimed. I / we await the revised calculations and we also claim the refund of any tax overpaid by me / us.''

I assume that the overseas property referred to in your query is not let, and, if it is let, you have declared the rental income from the property.

How does this sound to you?

Ramnik

[spitfirepilot]

Thanks, you're a star. And no, we do do not yet let the overseas property (awaiting for a licence to do so!).

[Tax Accountant]

Thanks, you're a star. And no, we do do not yet let the overseas property (awaiting for a licence to do so!).

You are welcome.

Please also note that if one acquires a property, at home or abroad, and uses it as a second home, it may be possible to nominate the second home as main residence for CGT purposes within 2 years. If the second home subsequently ceases to be so used, eg it is let, the main residence exemption reverts automatically to the first property.

Many people do not realise that a second home could be a main residence for CGT purposes if that is more beneficial. Even if it is a main residence, actually or by nomination, for only a short time, it serves to open up other CGT reliefs such as final 3 years PPR exemption and lettings relief.

Ramnik

[johnj]

Dear Spitfire

I am sorry to be the bearer of bad news BUT:

Interest relieve is only available for qualifying loans used for a qualifying purpose. Typically, if the asset acquired gives use to taxable income the loans raised to acquire it can be qualifying loans and the interest suffered can qualify for interest relief. On that basis, once the UK property becomes income producing the loan of 65K raised to buy it can become qualifying. If the overseas property is not a rental property then the monies raised to acquire it will never give rise to qualifying interest. If it was bought to let out or if it later becomes a let property then the interest on those monies may be ‘qualifying’ interest and give rise to relief. Refinancing does not change the character of the loan interest but is looked through, back to the original purpose for which the loans were raised, and the application of the loan monies to qualifying or non qualifying purposes.

The security for the loans is irrelevant as is the amount of the loan by reference to the value or cost of the asset that the loans are raised against.

The view, as stated earlier, that the loans should qualify for relief by reference to the property value when vacated, in incorrect.

[Tax Accountant]

Dear Spitfire

I am sorry to be the bearer of bad news BUT:

Interest relieve is only available for qualifying loans used for a qualifying purpose. Typically, if the asset acquired gives use to taxable income the loans raised to acquire it can be qualifying loans and the interest suffered can qualify for interest relief. On that basis, once the UK property becomes income producing the loan of 65K raised to buy it can become qualifying. If the overseas property is not a rental property then the monies raised to acquire it will never give rise to qualifying interest. If it was bought to let out or if it later becomes a let property then the interest on those monies may be ‘qualifying’ interest and give rise to relief. Refinancing does not change the character of the loan interest but is looked through, back to the original purpose for which the loans were raised, and the application of the loan monies to qualifying or non qualifying purposes.

The security for the loans is irrelevant as is the amount of the loan by reference to the value or cost of the asset that the loans are raised against.

The view, as stated earlier, that the loans should qualify for relief by reference to the property value when vacated, in incorrect.

I am not aware of johnj's professional background. Without meaning to be disrespectful to him, I can categorically confirm that the view expressed above by him is totally incorrect in the circumstances of this thread. It may be a small comfort that he is not alone in holding on to this long 'out of date' incorrect view.

Ramnik

[Tristan]

I agree with Ramnik. HMRC changed their view on allowable interest a couple of years ago and amended their manuals. There's an example at BIM 45700 which is similar to the case here.

Interest should be allowable up to the value of the property when it was brought into the rental business.

[Tax Accountant]

Just to emphasise, interest is allowable on a loan up to the value of the property when it was first brought into the rental business, but the loan must be secured on the let property itself. In this case there is no restriction on how the remortgage proceeds is used, ie, it is free to be used for personal purposes, including paying off or reducing a mortgage on owner occupied residential property.

If the remortgage proceeds is used for qualifying purposes, eg, improvements or buying other properties for letting etc, there is no restriction on the amount borrowed, and if secured, which property it is secured on.

Ramnik

[Tassotti]

Please also note that if one acquires a property, at home or abroad, and uses it as a second home, it may be possible to nominate the second home as main residence for CGT purposes within 2 years. If the second home subsequently ceases to be so used, eg it is let, the main residence exemption reverts automatically to the first property.

Many people do not realise that a second home could be a main residence for CGT purposes if that is more beneficial. Even if it is a main residence, actually or by nomination, for only a short time, it serves to open up other CGT reliefs such as final 3 years PPR exemption and lettings relief.

Ramnik

Hi Ramnik

If the overseas property has already been let, can it still be nominated as main residence at a later date?

Where you say within 2 years, what does this mean? Within 2 years of what (purchase?)
Tass

[Tax Accountant]

Hi Ramnik

If the overseas property has already been let, can it still be nominated as main residence at a later date?

Where you say within 2 years, what does this mean? Within 2 years of what (purchase?)
Tass

The property has to be used as a residence for yourself for it to be nominated as a MAIN residence.

The 2 year time limit is from the date that you have two or more properties available to be used as a residence. This two year limit can recommence once again whem the current letting ceases and you have the property available once again to be used as your residence and do in fact actually use it as your residence.

Ramnik