Claim tax relief on BTL mortgage only or also on others?

[silvercar]

New to letting, all help gratefully received.

Situation is that I am completing on my new residential home and a house to be let on the same date.

I have a BTL mortgage arranged on the rental property for 75% its value. The remaining 25% is being financed by the main mortgage on my ppr. As this mortgage was applied for before the BTL mortgage I have no evidence that the intention was that some of it should be used to pay for the BTL. (Its an offset mortgage so it was logical to take the max available. now instead of having a lot of savings on that mortgage the savings are being used as the deposist on the BTL).

As time goes by I would like to pay down one of the mortgages. Logically it would be sensible to reduce the mortgage on the BTL as it is at a higher rate.

My question is about the tax relief I would get. Am I correct in thinking that I can put all the interest upto the total purchase price of the BTL against the rental income, including the 25% coming from the mortgage on my ppr.

Can I also reduce my BTL mortgage but have the same total mortgage amount (the BTL purchase price) allowable (my total mortgage taken on the 2 properties will be above the value of the BTL for a long time!)?

[Tax Accountant]

[QUOTE=silvercar]New to letting, all help gratefully received.

Situation is that I am completing on my new residential home and a house to be let on the same date.

I have a BTL mortgage arranged on the rental property for 75% its value. The remaining 25% is being financed by the main mortgage on my ppr. As this mortgage was applied for before the BTL mortgage I have no evidence that the intention was that some of it should be used to pay for the BTL. (Its an offset mortgage so it was logical to take the max available. now instead of having a lot of savings on that mortgage the savings are being used as the deposist on the BTL).

As time goes by I would like to pay down one of the mortgages. Logically it would be sensible to reduce the mortgage on the BTL as it is at a higher rate.

My question is about the tax relief I would get. Am I correct in thinking that I can put all the interest upto the total purchase price of the BTL against the rental income, including the 25% coming from the mortgage on my ppr.

Answer: Yes:

Can I also reduce my BTL mortgage but have the same total mortgage amount (the BTL purchase price) allowable (my total mortgage taken on the 2 properties will be above the value of the BTL for a long time!)?

Answer: In this case, only the loan originally used for the BTL deposit will be eligible, and nothing else. The remaining loan on the PPR has been for the purpose of buying the PPR property and this status cannot be changed without re-mortgaging.

You could pay off the PPR mortgage and at a later date, re-mortgage the PPR. In this case the interest on the re-mortgage amount used to redeem any part of the original purchase of the BTL property will qualify.


I hope the above replies (in red ink) are clear.

Ramnik

[silvercar]

Thanks for that.

Can I use some figures so I completely understand the situation.

Say the BTL purchase price was £100k, £75k on a BTL mortgage and 25k as part of a 200k mortgage on my ppr.

Initially I can have relief on £100k purchase price.

Two years later lets say I want to reduce my total mortgage commitments by 25k. The interest rate on the BTL is higher so at first glance I should reduce that mortgage to 50k and keep the 200k mortgage on my ppr.

But then would I be entitled to relief on 75k or 100k?

So, for tax reasons, should I keep paying the 75k on the BTL at a higher rate and reduce my ppr mortgage to £175k?

[Tax Accountant]

Thanks for that.

Can I use some figures so I completely understand the situation.

Say the BTL purchase price was £100k, £75k on a BTL mortgage and 25k as part of a 200k mortgage on my ppr.

25K secured on the PPR is effectively 1/8th of the total mortgage of £200K on the PPR property. Therefore, your eligible interest on this loan will always be 1/8th of the total interest in any tax year.

Initially I can have relief on £100k purchase price.

Yes.

Two years later lets say I want to reduce my total mortgage commitments by 25k. The interest rate on the BTL is higher so at first glance I should reduce that mortgage to 50k and keep the 200k mortgage on my ppr.

But then would I be entitled to relief on 75k or 100k?

You would get the relief on the £50,000 secured on the BTL. Additionally, you will get relief on 1/8th of £200,000 mortgage remaining on the PPR. Therefore, the total relief will be on the interest on £75,000.

So, for tax reasons, should I keep paying the 75k on the BTL at a higher rate and reduce my ppr mortgage to £175k?

On the face of it, yes. But you should do your sums. Your relief will be on £75K secured on the BTL plus 1/8th of the £175K remaining on the PPR property.

You will see from this that your eligible loan of £25K included as part of the £200K will reduce as the PPR mortgage reduces. The eligible loan will always be 1/8th of the total loan unless your lender has kept the £25K and £175K loan separate in its own records and your capital repayments are specifically identified against the £175K loan by your lender.



See answers in red above.

Ramnik

[silvercar]

Thanks for that it is now clear what is allowable and what isn't. In practical terms its going to be messy as my ppr mortgage is interest only offset, so could have a different outstanding balance at intervals throughout the year.

I have redemption penalties until Jan 2008. So I then will probably remortgage keeping the original BTL deposit element separate and the rest offset.

Thanks for your time and clear explaination.

[Tax Accountant]

Thanks for that it is now clear what is allowable and what isn't. In practical terms its going to be messy as my ppr mortgage is interest only offset, so could have a different outstanding balance at intervals throughout the year.

I have redemption penalties until Jan 2008. So I then will probably remortgage keeping the original BTL deposit element separate and the rest offset.

Thanks for your time and clear explaination.

You are welcome.

Ramnik