Remortgage on rental property
Discussion
Normally, the cost of financing a loan for the purchase of a rented property can be offset against the rental income from that property. The important factor is that the finance costs were incurred in order to finance the purchase of the property.
If you use a property as collateral/security to increase borrowings, that element of the extra finance costs relating to the extra borrowing will only be allowed against the rental income from that property IF if the additional borrowing was taken out for expenditure on that property.
If you use a property as collateral/security to increase borrowings, that element of the extra finance costs relating to the extra borrowing will only be allowed against the rental income from that property IF if the additional borrowing was taken out for expenditure on that property.
rfisher said:
Thanks Eric.
Is it worth asking HMRC?
Do they like being asked questions or will they come round to my house and bite me?
You can always ask and they may even give you the correct answer. However, unless you get a ruling from them in writing, they will never stand by any advice they have given to a taxpayer.Is it worth asking HMRC?
Do they like being asked questions or will they come round to my house and bite me?
The "allowability" of loan interest for tax purposes is directly linked to the purpose of the loan. How the loan is secured (if it is secured) is not relevant.
From what info you have posted,then tax relief would not be allowed. As a landlord myself, i used my home to raise monies/loan to purchase a buy to let, tax relief being allowed on the charges in raising the loan, and on the interests being charged on the loan.
You can of course ask HMR&C for advice etc., but not only as Eric correctly stated, HMR&C will always give a disclaimer against their advice, but you will also be placing your face, tax affairs in the window box, for possible further investigations at a later date.
You can of course ask HMR&C for advice etc., but not only as Eric correctly stated, HMR&C will always give a disclaimer against their advice, but you will also be placing your face, tax affairs in the window box, for possible further investigations at a later date.
What he is saying is a bit loose. He seems to be saying that they probably ASSUME that the purpose of an additional loan which does not exceed the original capital value of the original loan is in respect of the property.
This is actually not often the case and, technically, if it the loan isn't for THAT property, then interest relief cannot be obtained for offset against income derived from THAT property.
That is what tax law says.
As ever, it seems that HMRC can break their own rules, but woe betide anyone else who breaks the rules.
And guess what type of sympathy you would get from a tax tribunal if the reason you gave for incorrectly claiming tax relief on loan interest was "My mate who works for HMRC told me it was OK".
This is actually not often the case and, technically, if it the loan isn't for THAT property, then interest relief cannot be obtained for offset against income derived from THAT property.
That is what tax law says.
As ever, it seems that HMRC can break their own rules, but woe betide anyone else who breaks the rules.
And guess what type of sympathy you would get from a tax tribunal if the reason you gave for incorrectly claiming tax relief on loan interest was "My mate who works for HMRC told me it was OK".
I presume that the owner of a rental property can borrow more on it (remortgage) or repay lump sums (overpay) as and when they like?
Or are you saying that the owner is obliged to keep the current mortgage amount and not go above that amount on the property?
The purpose of the mortgage is to enable the owner to own it without having to pay for it all in one go - no?
Or are you saying that the owner is obliged to keep the current mortgage amount and not go above that amount on the property?
The purpose of the mortgage is to enable the owner to own it without having to pay for it all in one go - no?
rfisher said:
I presume that the owner of a rental property can borrow more on it (remortgage) or repay lump sums (overpay) as and when they like?
Or are you saying that the owner is obliged to keep the current mortgage amount and not go above that amount on the property?
The purpose of the mortgage is to enable the owner to own it without having to pay for it all in one go - no?
If the purpose of the loan is to buy or extend the property (or carry out major repair work on the property), then the interest on that loan can be offset against rental income from that property.Or are you saying that the owner is obliged to keep the current mortgage amount and not go above that amount on the property?
The purpose of the mortgage is to enable the owner to own it without having to pay for it all in one go - no?
If the loan is for some other purpose, then the interest on that loan CANNOT be offset against rental income from that property. It doesn't matter if the loan was secured by a mortgae on the property. That has nothing to do with the purpose of the loan.
It is a simple and straightforward concept.
OK - looks like a second advance on a rental property to decrease the mortgage on a main residence would not attract tax relief on the interest payments.
That's very helpful advice - thanks.
What about the CGT position?
Say you go from 10% LTV on the rental to 90% LTV thereby decreasing the profit on the sale of the property.
Presumably you are then only liable for CGT on the 10% profit as opposed to the 90% profit you would have made?
That's very helpful advice - thanks.
What about the CGT position?
Say you go from 10% LTV on the rental to 90% LTV thereby decreasing the profit on the sale of the property.
Presumably you are then only liable for CGT on the 10% profit as opposed to the 90% profit you would have made?
I can't see how the extent of borrowing will affect the profitability of the investment from a CGT point of view.
CGT is calculated on the difference between what you actually paid for a property compared to what you get for it when it is eventually sold. The actual method of how you financed the deal is of limited impact (you might be able to add on to the original purchase cost of the property some arrangement fees etc incurred when the original loan was taken out).
If you take out a further loan to ENHANCE the property, then some of the set up costs of borrowing can also be added on to the "Enhancement Expenditure".
CGT is calculated on the difference between what you actually paid for a property compared to what you get for it when it is eventually sold. The actual method of how you financed the deal is of limited impact (you might be able to add on to the original purchase cost of the property some arrangement fees etc incurred when the original loan was taken out).
If you take out a further loan to ENHANCE the property, then some of the set up costs of borrowing can also be added on to the "Enhancement Expenditure".
The principle of CGT is rather simple - although the actual computations can become very complicated.
Here is a typical house purchase/sale scenario -
Buy House 1/1/2004 - £100,000
Ancilliary Costs on Purchase (Stamp Duty, Legal Fees etc) - £5,000
Enhancement Costs 1/6/2006 (say an Extension) - £35,000
Total Cost of property for CGT purposes - £140,000
Property Sold 31/03/2010 - £205,000
Selling Costs (say estate agent's fees) - £5,000
Gain - Sale Proceeds £205,000
Less Selling Costs - £5,000
Less origional cost of purchase and enhamcement costs - £140,000
Chargeable gain - £60,000
Personal CGT allowance - £10,100
Taxable Gain - £49,900
Tax at 18% - £8,982.00
Repaying the balance on the mortgage has nothing to do with the gain or loss on disposal.
Repaying a loan is not considered a tax deductable cost. Why should it be? After all, did you think that the loan amount you originally received was income for tax purposes?
Here is a typical house purchase/sale scenario -
Buy House 1/1/2004 - £100,000
Ancilliary Costs on Purchase (Stamp Duty, Legal Fees etc) - £5,000
Enhancement Costs 1/6/2006 (say an Extension) - £35,000
Total Cost of property for CGT purposes - £140,000
Property Sold 31/03/2010 - £205,000
Selling Costs (say estate agent's fees) - £5,000
Gain - Sale Proceeds £205,000
Less Selling Costs - £5,000
Less origional cost of purchase and enhamcement costs - £140,000
Chargeable gain - £60,000
Personal CGT allowance - £10,100
Taxable Gain - £49,900
Tax at 18% - £8,982.00
Repaying the balance on the mortgage has nothing to do with the gain or loss on disposal.
Repaying a loan is not considered a tax deductable cost. Why should it be? After all, did you think that the loan amount you originally received was income for tax purposes?
Edited by Eric Mc on Tuesday 15th June 09:10
I have a query in relation to remortgage interest. I am aware that loan interest on remortgages up to the initial value of the property(ies) is allowable. My question relates to what interest is allowable once remortgage levels exceed the orinal propery values.
Example 1: 50k extra is borrowed in a year when the business as a whole makes a loss of £75k. Can I argue that the 50k extra has been used to fund the business and therefor it is all allowable?
Example 2: 50k extra is borrowed in a year when the business as a whole made £75k profit BUT maintenance costs on properties were £60k. Can I argue that the 50k extra has been used to fund maintenance costs and therefor it is all allowable
Example 3: 50k extra is borrowed in a year when the business made a profit OR a loss but total costs of the business were 100k. Can I argue that the 50k has been used to fund running costs of the business and therefor it is all allowable.
In addition, there will be variants of the above where all or some of the elements of each of them are present. Is there an easy way of working this out?
Example 1: 50k extra is borrowed in a year when the business as a whole makes a loss of £75k. Can I argue that the 50k extra has been used to fund the business and therefor it is all allowable?
Example 2: 50k extra is borrowed in a year when the business as a whole made £75k profit BUT maintenance costs on properties were £60k. Can I argue that the 50k extra has been used to fund maintenance costs and therefor it is all allowable
Example 3: 50k extra is borrowed in a year when the business made a profit OR a loss but total costs of the business were 100k. Can I argue that the 50k has been used to fund running costs of the business and therefor it is all allowable.
In addition, there will be variants of the above where all or some of the elements of each of them are present. Is there an easy way of working this out?
Allowable interest in this case would be the total interest apportioned between the borrowings up to the allowable capital level versus the interest on the borrowings beyond the allowable capital level.
Can someone point out to me the piece of tax legislation that states that loan interest is allowable as a deduction from rental income EVEN IF THE ADDITIONAL LOAN WAS NOT FOR THE PURPOSE OF FINANCING THE RENTAL PROPERTY OR WORK ON THE PROPERTY?
Can someone point out to me the piece of tax legislation that states that loan interest is allowable as a deduction from rental income EVEN IF THE ADDITIONAL LOAN WAS NOT FOR THE PURPOSE OF FINANCING THE RENTAL PROPERTY OR WORK ON THE PROPERTY?
Edited by Eric Mc on Tuesday 18th January 08:30
Thanks for this Eric, I have 3 additional questions:
Can I include the ancilliary costs for CGt purposes if I bought the property as my main residence, but then moved it into a BTL? Can I include these costs in my calculation or not?
The improvement costs which you talk about, do they have to be large things like an extension, or can I also include things like a new central heating system, conversion of a garden to a parking space and general maintenance costs?
And finally, If I buy a property and live in it, then rent it out for 3 years and then go back to live in it for 1-2 years, do I get to start the clock again on the 3 year CGT free period again, or can I only claim 1 per property?
Many Thanks
Can I include the ancilliary costs for CGt purposes if I bought the property as my main residence, but then moved it into a BTL? Can I include these costs in my calculation or not?
The improvement costs which you talk about, do they have to be large things like an extension, or can I also include things like a new central heating system, conversion of a garden to a parking space and general maintenance costs?
And finally, If I buy a property and live in it, then rent it out for 3 years and then go back to live in it for 1-2 years, do I get to start the clock again on the 3 year CGT free period again, or can I only claim 1 per property?
Many Thanks
Edited by The jiffle king on Tuesday 18th January 08:27
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