Claiming Interest on own property

[Beaverman33]

Apologies if this has already been asked before . . . I've had a search through the forums but could not find my exact situation.

My wife and I own 5 rental properties and are looking to expand our portfolio. If we remortgage our existing domestic property but used the money to buy a rental property would we be allowed to claim the mortgage interest charges on our tax return?

Example –
We own property 1 which we live in - value £150,000.
This property does not have a mortgage on it.
We remortgage property 1 and withdraw £50,000 of equity from it which is used to purchase property 2.
All of the money raised from the remortgage of property 1 is used exclusively for the purchase of property 2.
Property 2 is a rental property which would then be bought outright using the money from property 1 plus some additional savings.
I am assuming that as we would resident in property 1 we would have to take out a standard mortgage rather than a buy-to-let mortgage.
Is this the case, if so are we allowed to claim for the mortgage interest on our tax returns in this situation - or can you only claim if it is a buy-to-let mortgage?

I spoke to the tax office about this and was directed to BIM45700, but this does not really answer my specific query. Any help on this issue would be much appreciated.

Many thanks.

[subjecttocontract]

Yes you can claim the interest.

[GJMSurrey]

Another yes, but just to add, keep a paper trail showing money coming in and out should you be challenged.

[rmmc]

You can raise the fund against your residential property and can offset the cost of interest against your rental income.

However, you may need to check the mortgage conditions, there may be restrictions on use of the fund to buy property for lettings purpose, best to check with the mortgage provider or read the small prints.

[Phlash]

Here's an eg to help:

Originally bought your home for £110,000 with mortgage of £80,000.

5 years later it is worth £150,000 and outstanding mortgage is £70,000. You remortgage to £120,000, using the extra £50,000 to purchase a new BTL property.

The interest on the £50,000 is an allowable tax deduction against your rental profits as its purpose was for the lettings business despite being secured against your home. The £50,000 mortgage may be separate to the £70,000 one, and therefore it is easy to track the interest, otherwise you may have to apportion, ie. 5/12 of total mortgage interest.

The advice given above to ensure the separation of the funds above is good, it helps to prove the £50k loan is for the rental business. Having a separate rental business bank account makes it very easy to track the money, and should save a lot of admin time. Most expenses can be tracked using this account, and only a few applicable and apportionable expenses would be left coming out of your personal account....ie. telephone bill of which 10% could be for the rental business, etc.

BIM 45700 talks about your capital account. Simply, add up the values of the properties on the date that you brought them into your 'lettings business' plus any improvement expenditure since. This total is your capital account, you can claim interest expense on mortgage balances up to this amount. Beyond that you cannot claim a tax deduction.

If you find you have a shortfall, i.e. your loans are not as big as the capital account, you cannot simply add in your own home mortgage amount. (i.e. add in the £70,000 in the above example) The reason is that this home mortgage was for your personal purposes and not for the purposes of the lettings business.

One way commonly used to get the best tax deduction, is to remortgage your BTL properties and pay down your personal mortgage. By transferring the loans around in this way they are for the purpose of the lettings business and is in line with BIM 45700. Your £70,000 loan interest could then be getting a tax deduction. In effect if your home loan was 5%, then as a basic rate tax payer you would be reducing this to an effective 4% and as a higher rate tax payer to 3%, and as an additional rate tax payer 2.5%.

There you have it, first post complete.

[Telometer]

One way commonly used to get the best tax deduction, is to remortgage your BTL properties and pay down your personal mortgage. By transferring the loans around in this way they are for the purpose of the lettings business and is in line with BIM 45700. Your £70,000 loan interest could then be getting a tax deduction. In effect if your home loan was 5%, then as a basic rate tax payer you would be reducing this to an effective 4% and as a higher rate tax payer to 3%, and as an additional rate tax payer 2.5%.

But just be careful that you don't have a home loan at 3% which you replace with a BTL loan at 7% thereby increasing the net cost.

[Phlash]

But just be careful that you don't have a home loan at 3% which you replace with a BTL loan at 7% thereby increasing the net cost.

Indeed. I had rather presumed the reader would apply a sense check!

EDIT to add:

Telometer, by the way, prior to posting here I had observed your advice given on a number of threads. It's refreshing to see someone giving accurate advice on these types of forums, and on behalf of a lot of people I am guessing, thank you for your contributions.

[Telometer]

Indeed. I had rather presumed the reader would apply a sense check!

It's a thing about readers of forums, I've noticed, sense checks don't necessarily get applied! I often think it's worth stating the obvious, just in case.


It's refreshing to see someone giving accurate advice on these types of forums, and on behalf of a lot of people I am guessing, thank you for your contributions.

I try my best... it'll be nice to have you here too.

[GJMSurrey]

Challenging question:

One increases their residential mortgage from 70k to 150k, and spends 80k on the buy to let. The 80k comes in to the landlords bank account and transfers out to pay off a buy to let mortgage on another property - that's simple enough.

But what if one overpays their residential mortgage, either:

(a) it could be an offset mortage where landlord has 10k savings, or
(b) landlord may pay off a 10k lump sum

The landlord will want to register this against the 70k residential interest proportion payment and not the 80k used for the buy to let which they wish to pay off as late as possible.

Does the landlords simple offsetting the 80k e?vidence their intentions

[Phlash]

Challenging question:

One increases their residential mortgage from 70k to 150k, and spends 80k on the buy to let. The 80k comes in to the landlords bank account and transfers out to pay off a buy to let mortgage on another property - that's simple enough.

But what if one overpays their residential mortgage, either:

(a) it could be an offset mortage where landlord has 10k savings, or
(b) landlord may pay off a 10k lump sum

The landlord will want to register this against the 70k residential interest proportion payment and not the 80k used for the buy to let which they wish to pay off as late as possible.

Does the landlords simple offsetting the 80k e?vidence their intentions

I would submit the return on the basis the residential mortgage had been paid down, which is the more aggressive stance.

I would follow it with the following basis for taking the filing position: The LL has two debts for two different purposes. The LL can elect to reduce their debt exposure in the lettings business or the personal loan - it is his/her free choice. As this is a one off debt reduction the election to reduce either or is strengthened.

I think it is a different story if the LL is making monthly capital repayments on a regular basis. I would apportion these to each of the loans in their respective portions, as this is a mechanism of the loan and not a one off business/personal debt position decision.

I would be interested to hear Telometer's interpretation on it. Especially if there is an argument to apportion monthly repayments 100% to the personal proportion of the loan - to which I think there is not a solid case. I would only 100% apportion capital repayments to the residential loan if the £80k loan extension was taken out on an Interest Only arrangement when first taken out, I believe the answer will lie at the point of arranging the loan and the terms agreed to at this point.

[GJMSurrey]

I was assuming the same Phlash, that it would be free choice of the landlord where s/he would like to allocate their overpayments/savings offset amounts.

I did also think that the standard/regular monthly capital repayment amount should be split across both parts of the loan. Even though with an offset the landlord can theoratically pay as much or little as s/he wishes each month, having the regular monthly repayment amount set up as a standing order at an amount to repay the whole over 25-30 years would show an intention and help separate the interest for the letting business more easily.

Also interested in Telo's opinion

[Telometer]

I would submit the return on the basis the residential mortgage had been paid down, which is the more aggressive stance.

Aggressive? I think it's pretty neutral. I think that the alternative (of allocating it against the residential part rather than the BTL part) is a roll-over-and-let-HMRC-tickle-your-tummy approach.


I think it is a different story if the LL is making monthly capital repayments on a regular basis. I would apportion these to each of the loans in their respective portions, as this is a mechanism of the loan and not a one off business/personal debt position decision.

It depends, I suppose, whether there are two loans, or just one that you are notionally splitting. If there really are two separate loans, the first for the residential, the second for the BTL then the answer is obvious - follow the cash.

If you are merely notionally splitting the loan, then you come down to your interpretation of "wholly and exclusively". I am aware that my views here are perceived by some as somewhat bullish.

However, imagine you had never bought that BTL. You would have had an 80k loan that you would have been paying down the capital on. Any incremental debt (the 70k) is "obviously" wholly and exclusively for the purposes of the lettings business. So I would be inclined to submit the return on the basis that the capital repayment was allocated entirely against the residential part. This is certainly a filing position, one might feel inclined to use the white space.

I suppose if the entire BTL business was based on repayment loans one might be less bullish.

[Phlash]

Aggressive? I think it's pretty neutral. I think that the alternative (of allocating it against the residential part rather than the BTL part) is a roll-over-and-let-HMRC-tickle-your-tummy approach.



It depends, I suppose, whether there are two loans, or just one that you are notionally splitting. If there really are two separate loans, the first for the residential, the second for the BTL then the answer is obvious - follow the cash.

If you are merely notionally splitting the loan, then you come down to your interpretation of "wholly and exclusively". I am aware that my views here are perceived by some as somewhat bullish.

However, imagine you had never bought that BTL. You would have had an 80k loan that you would have been paying down the capital on. Any incremental debt (the 70k) is "obviously" wholly and exclusively for the purposes of the lettings business. So I would be inclined to submit the return on the basis that the capital repayment was allocated entirely against the residential part. This is certainly a filing position, one might feel inclined to use the white space.

I suppose if the entire BTL business was based on repayment loans one might be less bullish.


If at the point of the extension of the loan, the borrower agreed to repayment terms on the additional loan, then the repayments would need to be allocated against each.

As said up above, the terms of the loan at agreement will determine how to treat. Getting an extension on the loan on IO would obviously mean that any repayments are purely allocated to teh residential element.

I would say that the point about taking the position before hand is void once new terms of debt are agreed. i.e. The borrower did make capital repayments of say £100 per month, now with the additional laon makes capital repayments of £190. Allocating the full £190 to the residential element puts the borrower in a more favourable position than had they not taken out the loan, and for that reason the repayments should be allocated.

I'll keep thinking...

[Telometer]

The borrower did make capital repayments of say £100 per month, now with the additional laon makes capital repayments of £190. Allocating the full £190 to the residential element puts the borrower in a more favourable position than had they not taken out the loan, and for that reason the repayments should be allocated.

I did think about that one. However the borrower could always have overpaid his residential mortgage by that £90 per month, had he been so inclined. But then... what if he were overpaying out of the profits of the BTL, does that then mean he is required to offset it against the BTL element? Well, he is (in this case anyway) entitled to do what he likes with the profits of his business, and he is choosing to offset the residential mortgage element, not the business mortgage element.

It's indubitably grey, and the white space I think might be useful, but I don't feel it would be a filing position with a risk of being accused of negligence.

If the mortgage is fully flexible, i.e. you can draw down and repay at will, then I am certain of my position.

If the mortgage is repayment and does not permit overpayments, then certainly it is becoming very grey indeed, but I don't think mortgages generally have such inflexible terms.