Property Rental Income - loan interest

[JohnnyRingo]

Hello all

I am just completing my self assessment form and I have a couple of questions. I work full time and own a property which I rent out. This is my second year of completing the self assessment form.

Previously I owned the rental property outright. In August 2010 I took a buy-to-let mortgage on the property to release some equity to buy the house we now live in.

1) When completing my tax return I noticed in the "expenses for other property income" section that there is a box for "loan interest and other financial costs". The tooltip tells me:

"Include:

•the costs of obtaining a loan or an alternative finance arrangement to buy a property that you let
•any interest on such a loan or alternative finance payments "

The leaflet recommend offers no other information.

I would like to know if I can enter the mortgage fee and interest paid in this box as an expense? My concern is that I did not take the loan to purchase the house, I just released equity from it.

2) Secondly, are there any other savings I can make? So far I am only claiming my insurance and 10% wear and tear.


Thanks in advance for any assistance anyone can provide!

[King_Maker]

Interest on a loan to refinance your business capital account is allowable - up to the value of the property when it was first let. Use of the loan proceeds is not relevant.

Have you read HMRC's Property Income Manual on the subject?

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

[section 44]

Use of the loan proceeds is not relevant.

Others may disagree.

[pqtaxation]

Others may disagree.

Is that with the HMRC Manual or with King_Maker's interpretation of it? If the latter, what is your interpretation of the Manual?

[section 44]

My interpretation of the law is that you are only entitled to deduct interest against rental income on a loan to acquire, or refinance, the acquisition of the property. Hence the use of the proceeds is vital.

[JohnnyRingo]

My interpretation of the law is that you are only entitled to deduct interest against rental income on a loan to acquire, or refinance, the acquisition of the property. Hence the use of the proceeds is vital.

Thanks for your input. So in my scenario, where I refinanced the property by taking a mortgage over it, the mortgage arrangement fee and the interest paid can be offset against my tax?

[pqtaxation]

So in my scenario, where I refinanced the property .... can the mortgage arrangement fee and the interest paid be offset against my tax?

IMO, yes.

[maths]

Section 44:

My interpretation of the law is that you are only entitled to deduct interest against rental income on a loan to acquire, or refinance, the acquisition of the property. Hence the use of the proceeds is vital.

Refinancing of the property would extend to substituting interest bearing debt for capital introduced initially to effect the purchase; the maximum capital to be so refinanced being the market value of the property when first let.

I thus agree with King-Maker's comments.

In short interest is deductible for Johnny Ringo.

[King_Maker]

My interpretation of the law is that you are only entitled to deduct interest against rental income on a loan to acquire, or refinance, the acquisition of the property. Hence the use of the proceeds is vital.

So are you saying that HMRC are wrong? If so, I would be interested to know on what grounds?

There could be a lot of firms (including accountants, lawyers and tax advisers) who would be exceedingly worried.

[section 44]

To reiterate (in a property rental business context), my interpretation of the law is as follows: if the interest on a loan is to be deductible, then it is vital that the proceeds of the loan are used to acquire, or refinance, the acquisition of a let property.

King-Maker, it's probably easier to look at this another way. Why don't you provide some examples of an alternative use for the proceeds of the loan (i.e. other than to acquire, or refinance, the let property) and then explain how, by reference to those examples, the interest payments would satisfy the "wholly and exclusively" test (so as to be deductible in calculating rental profits).