Offset rental income against mortgage interest

by **nfernand** on Mon Mar 15, 2010 7:42 pm

Looking for advice on following matter.

i owned a freehold property (house) in Nottingham since May 2005 and lived there until Nov 2007 when I was relocated to work in London. Rather than sell the property I decided to rent it out, and is rented out even now. I've submitted tax returns for the rental income for the past 2 years up to tax year 2008/09 and will be doing so for this current tax year 2009/10. Since Dec 2007 I have been living with my parents, as it's very convenient to get to work in London.

I am about to buy a flat in Notting Hill, London which is very close to work. To raise the necessary deposit I have remortgaged my house. This together with my savings is close to sufficient for the 25% deposit. I have managed to secure a 75% mortgage (interest only) on the new flat.

Question: For tax purposes, can I offset the interest only mortgage payments (monthly about £680) on my new flat against the rental income from my house (monthly £870), rather than offset the interest payments on the remortgaged amount on my house, which is considerably small, about £215 monthly ? If yes and if I elect to do so, should I inform HMRC as to which property is my main home? I've read something in the press regarding options which property to claim on.

Be grateful for any advice. Many thanks
Norm

by **Ray Coman** on Mon Mar 15, 2010 8:12 pm

For income tax purposes, you can deduct mortgage interest from rental income on a loan up to the value of a property when first let. Financing can therefore be arranged to obtain maximum tax relief.

For capital gains tax purposes, your principal private residence (PPR) is exempt from capital gains tax. There are also periods of deemed residence (such as the final three years of ownership), and relief for periods in which your PPR is let (up to £40,000.) It is therefore worthwhile looking into which property should be elected as your PPR to minimise your tax liability.

You must let HMRC know which is your main property within two years, or else they will decide, usually based on whichever property you occupy the most. You can only change your main residence, if you nominate it within the first two years of first owning it.

by **Peter D** on Mon Mar 15, 2010 8:45 pm

PPR is a matter of 'fact' although a nomination is possible it you own two properties that could be your residence. However a rental property can not be your residence so nomination is not available and most probably not advisable anyway. Regards Peter

by **Incredulum** on Tue Mar 16, 2010 12:10 pm

Ray Coman wrote:For income tax purposes, you can deduct mortgage interest from rental income on a loan up to the value of a property when first let. Financing can therefore be arranged to obtain maximum tax relief.

That is incorrect - or at least incomplete. For income tax purposes, you can deduct mortgage interest from rental income on a loan up to the value of a property when first let. Provided the loan is either secured against the property, or has been taken out to purchase the property. In your circumstances therefore only the loan secured against your Nottingham property is deductible (and then only to the extent it does not exceed the value when first let).

It is therefore worthwhile looking into which property should be elected as your PPR to minimise your tax liability. You must let HMRC know which is your main property within two years, or else they will decide, usually based on whichever property you occupy the most. You can only change your main residence, if you nominate it within the first two years of first owning it.

Also incorrect in OP's circumstances. The Nottingham property is rented out, so it is not possible to elect for it to be your PPR.