Deductability of spousal interest

by **bulbasaurus** on Thu Dec 22, 2011 9:38 pm

I want to borrow money from my wife to buy a residential investment property by way of a 5 year loan at an interest rate comparable with a 5 year fixed rate mortgage - say 5%. Is this spousal interest expense an allowable expense against the rental income of the aforesaid property. Furthermore if it is deductible then, given that the loan will not be secured against the property, can I justify a more typical personal loan rate ( say 8%).

Thanks

by **pawncob** on Thu Dec 22, 2011 10:44 pm

As long as it's a fair market rate it should be deductible. Don't forget it'll be assessed on her, so HMRC aren't worried about the rate.

by **bulbasaurus** on Thu Dec 22, 2011 11:11 pm

Thank you that's good to hear - since she lives in Gibraltar which does not tax interest income then she should not incur any tax liability either in UK or Gibraltar. I presume it is important to evidence the loan with physical money transfer.

by **King_Maker** on Tue Jan 03, 2012 4:26 pm

You may have to deduct Income Tax at Basic Rate and notify HMRC etc, as your sister seems to based outside the UK. She may be able to apply to HMRC for the interest to be paid gross.

by **section 44** on Tue Jan 03, 2012 5:01 pm

Would it not be UK source income for her?

by **King_Maker** on Tue Jan 03, 2012 5:18 pm

Debt situs can be complex.

But ITA 2007 section 874(1)(d) seems to be explicit on the point?

by **section 44** on Tue Jan 03, 2012 5:39 pm

it doesn't answer whether or not it is interest "arising in the UK", the crux of the issue

by **King_Maker** on Tue Jan 03, 2012 5:53 pm

section 44 wrote:it doesn't answer whether or not it is interest "arising in the UK", the crux of the issue

I don't think it's relevant if the creditor is based abroad.

Same with paying rent to a non-resident landlord.

by **section 44** on Tue Jan 03, 2012 6:18 pm

It does because if the interest doesn't arise in the UK then section 874 is not in point whether or not the creditor is in the UK or abroad.

King_Maker wrote:Same with paying rent to a non-resident landlord.

No. If, for example, the rent was from a property outside the UK then there would not be any obligation to withhold. With rent or interest withholding obligations the key point is whether or not it arises in the UK.

by **King_Maker** on Tue Jan 03, 2012 6:34 pm

Yes, I should have included the word "UK" in relation to property.

Although it's up to the lender to apply for Gross payment, I would recommend the OP to contact HMRC for their ruling on the loan's situs - and therefore if the interest is "a payment of yearly interest arising in the United Kingdom ".