Remortgaging - let to buy & buy to let, ?% interest offset

[Sparkysea]

Dear tax experts
I was wondering if you would be really kind in giving me your opinion on how the tax man might look at my position please:

I have 2 buy to let properties and 1 property that was my home until I let it out 3 years ago. (I did not remortgage this before I moved to London were I am currently renting. I am looking to buy a flat in London and wish to remortgage all 3 properties so I can put a deposit down on a private residence in London.

My question is about how much interest on loans I can offset against tax if I remortgage all 3 properties please.

The 2 BTL were bought at £50,000 each and are now £120,000 each - I currently have a mortgage of £20,000 but I am looking to borrow another £50,000, thus would have a mortgage of £70,000 on each
My old residential property has a very small mortgage, bought at £46,000 and value is now £180,000.I am looking to remortgage this property to £100,000.

I have looked at previous postings but I am sorry I remain unclear as to whether I could offset 100% of interest against tax.

Many thanks for your help
Sparky sea

[Peter D]

You can only offset interest against rental income up to the value of the property when first let, in including your previous home. Did you have a valuation of the property when you first let it. Does that give you enough room ? Regards Peter

[pqtaxation]

Just to expand on Peter D’s guidance, HMRC’s position is given in their manual referenced below:

http://www.hmrc.gov.uk/manuals/bimmanual/BIM45700.htm.

You see how you have to calculate you capital account for each property.

For your former residential property (FRP) example 2 therein is relevant and you need the market value at the time you first let it 3 years ago as Peter D says.

For the initial two BTL only the original cost (plus cost of any capital additions) is relevant to your question. The increase in value of the property is credited to an unrealised revaluation reserve but you can only replace realised reserves by loans on which interest paid is an allowable cost for income tax on your rental business.

On your figures, your capital account on each BTL is £30k (£50 cost less 20 mortgage assuming no capital additions). So you cannot refinance by £ 50k --- you’re short by £20k per BTL property or £40k combined.

If market value of FRP three years ago was say £160k then your capital account would be that value assuming no mortgage (you say it’s very small) or capital additions. If you refinance £100k then you have headroom of £60k.

Hence if you increase your planned refinancing on FRP to £140k and reduced that on each BTL to £30k on above assumptions and ignoring refinancing costs you should be ok.

Hope you follow the methodology and apologies if I made a mistake on your specific numbers in rush --- in transit at an airport.

[Sparkysea]

Dear PQ taxation and Peter

Thank you very much for your swift advice, which is extremely helpful as I am interested in making an offer on a property on Monday.I was very touched that you have taken the trouble to reply.

I can forward this information to my broker who may be able to rejig the figures so I borrow more on the old residential property. I did not get a formal valuation(ie in writing, as I was not looking to sell) on this property but an estate agent advised that he thought it would be valued at £185,000 at the time I let it.

I am trying to raise £200,000 across the 3 properties and initially I chose to split it this way to keep as I understood potential CGT to a minimum. (I had read an article if you keep remortgaging and increase the borrowing above 60%, CGT is much higher when you come to sell and you could end up making no profit at all. Not sure if I have got this right.???...would be very grateful to hear of anything I should be aware re CGT and borrowing more money.

Thank you once again

Sparkysea

[pqtaxation]

I can forward this information to my broker who may be able to rejig the figures so I borrow more on the old residential property.

Sparkysea

Your mortgage broker may well be the exception that in my general experience mortgage brokers have little knowledge of tax.

I did not get a formal valuation (i.e. in writing, as I was not looking to sell) on this property but an estate agent advised that he thought it would be valued at £185,000 at the time I let it.
Sparkysea

Suggest you get at least two (more if greater than 5% apart) written open market valuations for now and three years ago when you first let property.

I had read an article if you keep remortgaging and increase the borrowing above 60%, CGT is much higher when you come to sell and you could end up making no profit at all. Not sure if I have got this right.???...would be very grateful to hear of anything I should be aware re CGT and borrowing more money.
Sparkysea

Without seeing the article to which you refer it is not possible to be certain but it is probable that you have misunderstood. Clearly the cost of refinancing impacts on your profit and if you pay higher interest costs because the loan to value is increased then ditto. But CGT is fundamentally calculated on the gain between the cost of purchase (plus capital additions) and proceeds from disposing without taking into account how you finance the purchase. Hence (over) generally costs of refinancing don’t affect (reduce) the taxable gain --- though the taxation of loan origination costs and discounts from face value (especially where there is a foreign currency aspect) is more complex than that (over)generalisation.

[Sparkysea]

Hi PQ taxation
Thank you verymuch for your comments, I have taken on board what you have said. Will try and find article which I kept. May come back to you in the near future. Thanks for all your help.
Sparkysea

[Incredulum]

I can forward this information to my broker who may be able to rejig the figures so I borrow more on the old residential property.

It makes no difference how you split the total loan across the three rental properties. You can deduct interest on £285k worth of mortgage interest (185+50+50) even if the full 285 is secured on just one of your rental properties.

[Sparkysea]

Dear Incredulum
Thank you for your comment, sorry I am confused.
Are you saying because the 3 properties are in a letting business you can group the value together and then offset interest against rent as long as it does not exceed the value of the 3 properties when they first became part of the business? Do you know where the HMRC states this please?
Thank you very much for your help, it will make a big difference if this is the case
Sparkysea

[Incredulum]

Yes, you have one letting business. http://www.hmrc.gov.uk/manuals/bimmanual/bim45700.htm