remortgage of a BTL property

[apples]

Hi,

We took out a mortgage on our main residence to acquire a BTL 5-years ago. We have off-set this morgage against our income.

We are now looking to move our main residence.

a) If we take out a remorgage on the BTL, then pay-off our original morgage, is the remorgage off-setable against the income, or only up to the level of the original mortgage?


b) If we sell our house, then get a new (larger)mortgage for the new house - can we still off-set the level of the original mortgage off our rental income?


many thanks

[James Smith]

Nigel,

Always a good one this.

The max offset you can get is the value of the let properties when you actually bought them, or took them into your lettings business. (Although some accountants will tell you it is only the amount you originally borrowed at that time)

Ie if you have 5 * 100k, the max is £500k, even if the portfolio is now worth say £750k.

It doesnÂ’t matter where the mortgages are secured against, or how many times your remortgage, its down to the amount of capital originally invested in your lettings business that is the max you can offset.

I don’t know if you are into double entry, but it may make sense if I do an example using the figures of 5*100k properties, if originally you took out a loan of 75k on each property, so £375k your "balance sheet" would look like this:

Properties £500k

Less
Borrowings £375k
Owners equity £125k
Total £500K


In say 5 years time, the properties have increased to (say) £750k (ignoring rental income and repayments) and you have:

Properties £750K

Less
Borrowings £375k
Owners equity £125k
Capital Growth £250k
Total £750k

Now you can withdraw the owners equity of £125k and replace this with borrowing at any time, but what you can’t do is withdraw more than is actually there in the first place.

So you can remotgage (a) and change where the mortgage is held (b) and possibly even increase your offset when buying your new property.

This is actually one of those areas that there is not a consensus on, but for other advisors the IR manual here is worth a read, BIM45700 example 2 gives a good description of the above mechanism.

If you need some help with your planning or returns, then please let me know.

Regards,

James Smith
Chartered Accountant
www.jamesesmith.co.uk
01284 764436

[Ian McTernan CTA]

Hi James, good to see you back on the forum. I would just clarify one point. The total available as mortgage interest deductible is the total value of the properties when purchased, which is what your example clearly shows. However, the value when first introduced in to the rental 'business' has no bearing on this. Taking an example: Property bought for £100K in 1993, using 75K mortgage and 25K capital, and lived in until 2003 when let out. Value in 2003 £400K. You can remortgage to say 75% (300K), but the maximum interest allowable is on the 100K. The rest has not been used for a qualifying purpose.

What you achieve by remortgaging up to the original purchase price is effectively replacing one form of capital used in the purchase of the property (cash) with another (mortgage).

And a word of warning- the Revenue take a dim view of even this (despite what their manual says) and will resist allowing the additional interest until you exlain it in words of one syllable to them...although I have recently had the Revenue accept a very similar position. I tend to find that if they start an enquiry then they will make sure if they have to concede this point they will find something else to disallow- typically on repairs and maintenance, or fees for dealing with their enquiry after they find something minor and make an adjustment.

Ian McTernan CTA
McTernan Associates Ltd
Chartered Tax Advisers
ian@imcternan.com