Interest on other loan as "allowable expenses?"

[johne1234]

Hi,
This is a follow up question to my first post on "Interest as Allowable Expenses" nearly a year ago.(http://www.landlordzone.co.uk/forums/showthread.php?t=1057)

I have lived in my flat for several years, & am about to move into a new flat which I have just bought. I intend to rent out my current flat. I have tried to remortgage my current flat (with my existing lender), in order to release extra equity in it, so as to maximise my interest payments for tax purposes.

However, my remortgage application was refused, simply because the lender has told me that they will not lend extra money against a property which is about to be rented out (it is still a residential mortgage, not a buy-to-let).

So, instead of getting extra money by remortgaging this flat, my parents have loaned me £50,000 (I do need this money for a deposit for my new flat; it is not for the sole reason of maximising interest payments). I am now paying interest to my parents every month on this £50,000 loan.

My question is: can I claim this interest I am paying to my parents as allowable expenses for my lettings business for tax purposes? Do I have to show somehow that the £50,000 loan is secured on my flat which I am renting out? Or will the tax-man say that this £50,000 loan is nothing to do with my lettings business?

Any advice on this would be much appreciated.
Many thanks,
John

[Tax Accountant]

Hi,
This is a follow up question to my first post on "Interest as Allowable Expenses" nearly a year ago.(http://www.landlordzone.co.uk/forums/showthread.php?t=1057)

I have lived in my flat for several years, & am about to move into a new flat which I have just bought. I intend to rent out my current flat. I have tried to remortgage my current flat (with my existing lender), in order to release extra equity in it, so as to maximise my interest payments for tax purposes.

However, my remortgage application was refused, simply because the lender has told me that they will not lend extra money against a property which is about to be rented out (it is still a residential mortgage, not a buy-to-let).

So, instead of getting extra money by remortgaging this flat, my parents have loaned me £50,000 (I do need this money for a deposit for my new flat; it is not for the sole reason of maximising interest payments). I am now paying interest to my parents every month on this £50,000 loan.

My question is: can I claim this interest I am paying to my parents as allowable expenses for my lettings business for tax purposes? Do I have to show somehow that the £50,000 loan is secured on my flat which I am renting out? Or will the tax-man say that this £50,000 loan is nothing to do with my lettings business?

Any advice on this would be much appreciated.
Many thanks,
John


Hi John,

Since the original correspondence, I have seen at least one other person state that the loan does not need to be secured on the let property. In support of his reply, he quoted the example of where the re-mortgage advance has been used for a qualifying purpose such as a deposit for another BTL. But this is not the same thing as using the advance for a private purpose.

In the final analysis, any payment has to be for the purposes of your lettings business for it to be an allowable deduction from your lettings income.

At present, you have not even moved out of your flat, let alone introduce it into your lettings business. I am guessing that you have already used the loan monies towards buying your new flat. This would make it a qualifying loan for the new flat and not the current home.

I don't believe you can recatagorise a transaction by simply giving it a lable of your choosing. In other words, you cannot classify a loan for the new property as if it is a loan to your lettings business.

What can you show to evidence that the loan has been made to your lettings business and not to you personally?

Without any form of attachment of the loan to the property which you intend to introduce to your lettings business, I cannot see how this loan can move into your lettings business along with the property.

Ramnik