Mortgage interest tax offset

[chris.headon]

Hi
In 2001 we remortgaged our home to release capital to purchase another property, then moved to the new property and rented out the original house. The interest on the mortgage is greater than the rent received after estate agent deductions, so I was originally told by the tax office they were not interested and not to complete any retuns. We have now been told that as some of the mortgage was used to purchase another property we may not be able to offset the entire interest against rental, can you advise what is the legal situation?
Thanks

[Tax Accountant]

Hi
In 2001 we remortgaged our home to release capital to purchase another property, then moved to the new property and rented out the original house. The interest on the mortgage is greater than the rent received after estate agent deductions, so I was originally told by the tax office they were not interested and not to complete any retuns. We have now been told that as some of the mortgage was used to purchase another property we may not be able to offset the entire interest against rental, can you advise what is the legal situation?
Thanks

If you had asked the question a year or so ago, your understanding in the last sentence of your query would have been correct.

However, it is now accepted that you could remortgage the previous main residence upto its FULL MARKET VALUE AT THE TIME YOU FIRST STARTED LETTING THAT PARTICULAR PROPERTY and be able to claim the full mortgage interest in your lettings business, regardless of what you used the re-mortgage advance for.

To confirm, the mortgage interest would be eligible in full as an eligible lettings expense even if you have used the re-mortgage proceeds towards buying a property which became your main residence.

However, you should really prepare the lettings accounts for each of the years since 2001 and roll up the losses each year to carry forward to later years. You should send this in to your tax office with a covering letter to confirm your formal claim to accumulated losses since 2001. The losses would be available to carry forward to future lettings profits, if any.

Ramnik

[chris.headon]

Thanks, that is a weight off my mind, I will be sending accounts for the past year initially so they can see the situation but i wanted to be sure of my legal position if they start to question my situation, thanks again.

[Tax Accountant]

Thanks, that is a weight off my mind, I will be sending accounts for the past year initially so they can see the situation but i wanted to be sure of my legal position if they start to question my situation, thanks again.

But what would you claim for the losses accumulated during the previous years without preparing rental accounts for all the years?

If you do as you say and do not enter anything for the losses of prior years (if any), effectively you are stating that there are no losses from prior years.

Ramnik

[chris.headon]

Hi again
The taxman has now contacted me with the legislation that says I cannot claim the full mortgage against the rent only the portion that relates to the original purchase price of the property. Is there a legal precident or more legislation anywhere that backs up yours and other legal experts claims that say I can offset the entire interest only mortgage? i must reply to the tax office soon and do not want to give away money if I do not have to.
Thanks

[Tax Accountant]

Hi again
The taxman has now contacted me with the legislation that says I cannot claim the full mortgage against the rent only the portion that relates to the original purchase price of the property. Is there a legal precident or more legislation anywhere that backs up yours and other legal experts claims that say I can offset the entire interest only mortgage? i must reply to the tax office soon and do not want to give away money if I do not have to.
Thanks

Refer him/her to HMR&C Business Income Manual BIM45700. This is found at the following link:
http://www.hmrc.gov.uk/manuals/bimmanual/BIM45700.htm
In particular, refer him/her to Example 2 therein.

The main point is that you could borrow UPTO the market value of the property AT THE DATE IT IS INTRODUCED TO YOUR LETTINGS BUSINESS.

If you bought a house to live in for £100,000 50 years ago and it is now valued at £1m (you wish!), and you decide to let it, you could mortgage it for upto £1m and the interest on the full mortgage of £1m would be allowable as an expense of your lettings business.

I hope this is clear.

Ramnik