Accounting for a BTL Remortgage - Driving Me Mad!

[solange]

Hi Everyone

Hoping someone can help before I drive myself mad tryingto fathom this out

Ok when you buy a BTL my understanding is the accounting works like this:

a) Standard purchase with BTL mortgage

Purchase price £100k
Mortgage £75k
Deposit £25k (say cash from personal savings)

dr fixed asset £100k
cr mortgage loan £75k
cr owners equity (capital a/c) £25k

However how do you treat a BTL property that is bought initially with cash, refurbed then remortgaged. Would the following be correct?
b) Cash purchase & refurb

Cash purchase price £35k
Refurb cost £35k

dr fixed asset £35k
cr owners equity £35k
dr repairs (p&l) £35k (this transaction not being allowable for tax purposes)
cr bank £35k

c) Subsequent remortgage of property

Revaluation £85k
Remortgage £68k

cr fixed asset £35k
dr owners equity £35k (thereby removing the original transaction completely)

then

dr fixed asset £85k
cr mortgage loan £68k
cr owners equity a/c £17k



Can anyone advise whether this is correct?

Also I have seen some rules that say you cannot put interest costs through for more than the original purchase price - can anyone shed any further light on this?

Many many thanks

A confused Solange





If you bu

[pawncob]

If the debit for refurb isn't tax deductible, why charge P&L? It's an addition to the freehold premises.

Remortgaging doesn't affect the value of the property, only the loan a/c and bank balance.

[solange]

Thanks for your reply pawncob.

So even though I have had another survey done on the property at £85k I still have to leave the value of the asset at £35k?

[pqtaxation]

So even though I have had another survey done on the property at £85k I still have to leave the value of the asset at £35k?

No.

Have a look at BIM 45700 to see the taxation aspects of deductible interest in unincorporated, owner-financed businesses, and HMRC’s approach thereto, and the shape of and categories within the balance sheet for the buy to let property business they expect you to prepare.

http://www.hmrc.gov.uk/manuals/bimmanual/bim45700.htm

Using that as a template the simple accounting entries are shown below. I’ll exclude a bank account but in practice a separate bank account for any business is a almost always a good idea as it will provide a clear record of all the transactions relating to this business which can be used to prepare a P&L account and balance sheet.

Purchase, renovate and mortgage BTL property business

1 Initial purchase
Db Freehold property at cost -- 35,000 (but what about other allowable purchase costs? Legal, survey etc)
Cr Owners Capital a/c 35,000
2 Capital improvements (renovation)
Db Freehold property at cost -- 35,000
Cr Owners Capital a/c 35,000
3 Revaluation of freehold to market value
Db Revaluation of freehold property 15,000
Cr Revaluation Reserve 15,000
4 Replace owner’s capital by mortgage financing
Db Owner’s capital withdrawn 68,000
Cr Mortgage loan 68,000
5 Summary balance sheet
Assets
Freehold Property at cost 70,000
Revaluation of freehold property 15,000
Total 85,000
Liabilities and Reserves
Mortgage loan 68,000
Revaluation reserve 15,000
Owner’s capital 2,000
Owners P&L reserve ????
Total 85,000

As the owner’s capital is not overdrawn (subscribed 70k, withdrawn 68, balance 2) the interest on the mortgage loan of £68k is deductible against letting income.

[solange]

Many, many thanks pqtaxation - your answer was very helpful and well explained.

Did try looking at BIM45700 prior to my original posting but got even more confused so gave up

Could I just ask a few more questions:

1) Do you keep equity and capital accounts separate or combinethem as one and the same?
2) If on one of the property's the owners capital balance is overdrawn, but on say three other property's the balance is positive can you offset this property's overdrawn balance against the others when deducting interest against letting income? ie can you offset all interest providing you have an overall positive balance on the owners equity a/c?

thanks