Qualifying interest expense on loan to property company

[Incredulum]

An individual sets up a company to hold BTL properties.

To fund the company he mortgages his own home and lends the cash to his company, interest free.

Is the mortgage interest tax deductible against his income tax?

[maths]

Is the mortgage interest tax deductible against his income tax?

I doubt it; can't find any authority to support such a deduction.

See ITA 2007 s383.

As an aside whatever happened to the "incredulum" who was once a regular poster here????

[Incredulum]

Hello Maths! Long time no see.

Is there a reason that s392 (2) (b) (i) ITA 07 would not apply?

[Incredulum]

Maybe 393(3)(b)...

[maths]

For some reason, without checking the legislation, I had it at the back of my mind that such interest would not be deductible where the company's business was investment properties ( ie a closely held investment company) [see 393(1)(a)].

Had a quick look but it does appear that prima facie 392 (2)(b)(i) is satisfied [see 393A(2)(b)].

Still a bit bemused though!

[Incredulum]

Yes, I didn't expect an investment company to be allowed. But iirc (this is legislation I avoid...) a CIHC is usually one where its property is rented to a connected party uncommercially. I got so over-excited with this that I forgot (to read on enough to find) the full time working condition.

[Incredulum]

On a connected point, this loan is secured on a BTL owned by the individual. The loan has come about from a refinancing of the BTL after an increase in its value and so represents withdrawal of capital such that the capital in the business becomes overdrawn (in the terms of BIM45700). No tax deduction against rental income would be allowed for the excess interest.

Can one argue that the company belongs to the business and so the interest may be offset against the rental income? I’m assuming that the interest will be in the wrong ‘Schedule’ as the interest cost of holding shares in a property business would not be a payment made W&E for the rental business. But one can always hope somebody has a clever solution!

[maths]

I had assumed you had satisfied yourself that s393 conditions were satisfied !!

[maths]

Can one argue that the company belongs to the business and so the interest may be offset against the rental income?

No; clutching at straws!

[Incredulum]

Having sat down now with a cold towel and the legislation, I can't see any reason for a deduction not to be available, much as I initially suggested. Apologies for confusion. This is why:


s383 allows us relief subject to subject to the provisions in 392 et seq., and subject also to 384,384B,385,386,387, 405.
384 refers to uncommercial rates and credit cards so is not in point.
384A refers to tax "arrangements" so not in point.
384B relates to partnerships so not in point
385 defines a loan so doesn't affect us
386 relates to mixed loans so not in point
387 denies you a double deduction

392 allows relief (2) (b)(i) for interest on a loan taken out to lend to a close company that is not a CIHC (see s393A).
(3), (3A), (3B) exclude specific conditions for EIS-type circumstances, (4) gives us definitions and (5) is woodlands.

393. To be eligible
(1) (a) it mustn't be a CIHC (see 393A) , and (b) you meet (2) and either (3) or (4)
(2) relates to circumstances where you've had capital back from the company which are set out in s407(1) and are pretty obvious - you can't have your cake and eat it.
(3) is the full time working condition which we fail, but we have the alternative of
(4) which is (a) having more than 5% of the company - material interest being defined in 394. [which with 100% we fulfil]
AND if it is an investment company then either (i) full time working condition or (ii) no property held by the company is used as a residence by the individual. [no problem there]

393A - the company must not be a CIHC. All close cos are CIHCs for the purposes of s392 and 393 unless existing for one of the purposes in (2) - see also (5).
(2) gives us six purposes, and the 'or' at the end of e (ii) confirms we need only meet one of the purposes.
(a) trade - fail
(b) investing in commercially-let land - see (3) for further details
(c)-(f) it's a group company in a group where one of the companies is OK - n/a

(3) gives further details regarding commercial letting of land, which excludes lettings to connected parties, relatives and spouses. Not a problem here.
(5) gives additional relief whereby if a company wasn't a CIHC when it was alive it doesn't become one in its throws of death.


So I really can't see any reason why the interest wouldn't be tax deductible where the company is set up to hold investments in land. And that'll teach me to try to guess what the legislation is trying to say without reading it carefully.


Companies that would not entitle an individual with a greater than 5% interest to relief for loan interest on a loan taken out to acquire shares in or lend cash to said company:
1. Those that invest in stockmarket shares. (no exclusion in 393A (2))
2. Those that let their property to relatives/spouses or associates (393A (3) excluding (2) (b))
3. Those that let their property to the individual in question (393(4)(b)(ii))

Have I missed anything? And if not, what a powerful tool this is for BTL investors. Tax relief at 45% (or more), income taxed at 20% going down to 15%; compared with interest restrictions. Seems odd that nobody mentions it.