Remortgaging and allowable deductions of interest

[Miffy]

If a remortgage is done, bringing the loan amount to more than the BTL property's initial purchase price, I understand that only the amount of the loan that is used for the rental business is allowed. A couple of questions, though:-

Say that the property gets its windows replaced for 3k after the remortgage. Is the interest on that 3k (OVER THE INITIAL PROPERTY PRICE) allowed to be deducted?

Say that there was another 20k borrowed. 4 years later the LL buys another BTL putting down a 30k deposit. Can he now offset the interest on the other 20k as a 30k payment into the business has been made and has to have come from somewhere? If not, how would the LL do this? Would he have to repay the 20k to the lender first, and then take out a completely new remortgage at roughly the same time as the new property was bought?

[Tax Accountant]

If a remortgage is done, bringing the loan amount to more than the BTL property's initial purchase price, I understand that only the amount of the loan that is used for the rental business is allowed. A couple of questions, though:-

(1) Say that the property gets its windows replaced for 3k after the remortgage. Is the interest on that 3k (OVER THE INITIAL PROPERTY PRICE) allowed to be deducted?

(2) Say that there was another 20k borrowed. 4 years later the LL buys another BTL putting down a 30k deposit. Can he now offset the interest on the other 20k as a 30k payment into the business has been made and has to have come from somewhere? If not, how would the LL do this? Would he have to repay the 20k to the lender first, and then take out a completely new remortgage at roughly the same time as the new property was bought?

This has been covered on many occasions in different forms and shapes.

(1) Window replacement is normally an allowable deduction as an expense of the lettings business. This will therefore reduce the profits chargeable to income tax. The expense will not be treated as an improvement and will not affect any CGT due upon sale in the future.

If the money for the window replacement was borrowed, interest on this would be an allowable expense of the lettings business.

(2) You would normally be allowed to increase the borrowing up to the original purchase cost of the BTL property. If any loan is in excess of this, the interest on the excess is normally not allowed as an expense in computing the profits of the lettings business unless the excess is used for a qualifying purpose, eg, using it as a deposit on buying another BTL property.

If the excess is used for a non-qualifying purpose, the interest on the excess is not allowable. At first sight it would appear that this situation will not change even if you subsequently bought another BTL and put down a deposit using personal funds. However, using the proprietor's capital account approach, I would be of the opinion that the original ''excess'' loan can now effectively be covered by the ''personal'' deposit to buy a subsequent BTL property.

I hope this makes sense and answers your query.

Ramnik

[Miffy]

At first sight it would appear that this situation will not change even if you subsequently bought another BTL and put down a deposit using personal funds. However, using the proprietor's capital account approach, I would be of the opinion that the original ''excess'' loan can now effectively be covered by the ''personal'' deposit to buy a subsequent BTL property.

I hope this makes sense and answers your query.

Ramnik

Thankyou very much for taking the time to reply. I think I understand this. A couple of questions to clarify:-

1) So I refer to the "excess" loan as being for personal use on my capital account and then just "move" it into business use when the new property is bought?

2) You say it is "your opinion." At the risk of showing my naivety, I take it that these things are not always cut and dried? Does it depend who the tax inspector is and their individual attitudes as to whether they feel like raising a challenge or not? If so, I guess its safer to remortgage at the time the deposit for the new BTL is required?

[Tax Accountant]

Thankyou very much for taking the time to reply. I think I understand this. A couple of questions to clarify:-

1) So I refer to the "excess" loan as being for personal use on my capital account and then just "move" it into business use when the new property is bought?

REPLY: The interest cost will be restricted to the extent that your capital account id overdrawn in your lettings Balance Sheet. There is no need to apportion the loan between business and personal.

2) You say it is "your opinion." At the risk of showing my naivety, I take it that these things are not always cut and dried? Does it depend who the tax inspector is and their individual attitudes as to whether they feel like raising a challenge or not? If so, I guess its safer to remortgage at the time the deposit for the new BTL is required?

REPLY: The law is the same for everyone, but different people interpret it differently. If and when you have paid a deposit on a new BTL, your capital account in your lettings Balance sheet will move in the right direction due to the credit for the deposit from your personal funds. This should then mean that there is no longer any need for restricting the interest cost, assuming that your capital account is back in credit.

But why borrow any extra money now if you don't require it until the purchase of the next BTL?




See replies above in red.

Ramnik

[Miffy]

That has set my mind at rest. Thanks once again!

[Miffy]

If the excess is used for a non-qualifying purpose, the interest on the excess is not allowable. At first sight it would appear that this situation will not change even if you subsequently bought another BTL and put down a deposit using personal funds. However, using the proprietor's capital account approach, I would be of the opinion that the original ''excess'' loan can now effectively be covered by the ''personal'' deposit to buy a subsequent BTL property.


Just a thought-is any and all expense on the BTL business "qualifying" eg furniture replacement or gas checks or annual insurance etc? Can you therefore increase your allowed deductible interest on loans every year if you add these to your capital account?

[Tax Accountant]

Just a thought-is any and all expense on the BTL business "qualifying" eg furniture replacement or gas checks or annual insurance etc? Can you therefore increase your allowed deductible interest on loans every year if you add these to your capital account?

Sorry, but I am not sure if you really understand the accounting term ''proprietor's capital account'' and how this works.

Without going in details, I would answer your question in short as a ''NO''.

Ramnik

[Miffy]

Sorry, but I am not sure if you really understand the accounting term ''proprietor's capital account'' and how this works.

Without going in details, I would answer your question in short as a ''NO''.

Ramnik

Ah, OK. I thought that might be too good to be true! Just thought it might be possible to use up the excess loan on expenses (FOR THE BUSINESS, of course) over time. Looks like I need to find some references to "Proprietor's capital account" on the web to educate myself-unless you have any useful links to hand?

Thanks again!