Remortgaging, one propery BTL and one property residential

by **savva0122** on Thu Oct 20, 2011 10:48 am

Dear tax experts,

Hope you can help me I'm getting more and more confused by my interest allowances on my mortgage!

I bought my first house (for my personal use) in 1999 for £80k. Lived there for 4 years and then moved another property. I rented out my old house, on a buy-to-let mortgage. Market value at the time £140k.

My new residential home was bought for £250k. Kept as separate mortgages.

When we remortaged 3 years later, the equity in my main property (and we paid a sum off the capital loan) was such we were allowed to move the BTL portion of the mortgage against my main property's residential mortgage to gain from a better interest rate. Thus, I currently have two mortgages on my main property, currently for £57k (rented) and £154k(res). I checked with HMRC and they said it was permissable to do this.

I'm now remortgaging again but my new lender says I must have one mortgage, ie combine the above for £211k. Am I allowed to work out the interest payable on the "original"/"rental" part of the mortgage myself and offset against tax? Also, I have just found out today about the BIM45700 rules; am I allowed to claim for tax relief on the £140k (MV at the time of becoming a commercial property) rather than the £57k I am currently?

So in a nutshell: one rental property; one residential property; currently two mortgage ; want to combine into one; am I allowed to claim tax relief on the rental prop? Am I allowed to increase the amount I currently claim interest relief to £140k from the £57k? Is there any difference for IT purposes on residential or buy-to-let mortgages.

From the research I've done this sounds legal but I'm just a bit wary of doing anything that might underhand.

Thanks for your help (wished I'd found this website ages ago!)

by **section 44** on Thu Oct 20, 2011 11:15 am

If the purpose of the borrowing was to acquire (or refinance) a let property then the interest is deductible even if the borrowing is secured on your home.

The new mortgage on your home is being used to refinance the existing mortgage on your home (1) and the existing homeowner loan secured on your home that you have used to refinance the original mortgage on your let property (2). Some, including me, would say that you are entitled to claim a deduction for part of this interest to the extent that it attributable to refinancing 2. However, another view is that none of the interest is dedcutible because it fails the "wholly and exclusively" test by reason of refinancing 1.

savva0122 wrote:Am I allowed to increase the amount I currently claim interest relief to £140k from the £57k?

Only if the "extra" £83k has been used to refinance (i.e. pay off existing debt) to acquire your let property. You could borrow against the let property, taking advantage of its increased value, and then use funds from teh new mortgage on your home to repay that buy-to-let borrowing. That would enable you to calim a tax deduction by reference to teh increased value but clearly there would be costs to doing so because of teh additional interim borroowing. What you propose may give the same end result but you would be short-cutting vital steps to get there and the tax anaylsis would be different as a consequence.

by **savva0122** on Thu Oct 20, 2011 11:33 am

Thanks, that's useful.

I worry about the "transparancy" of the refinancing deal and although there is an audit trail, going from BTL mortgage to res mortgage to part of res mortgage, it does get a bit more difficult to manage.

An alternate although less money-saving strategy I'm considering is just remortgaging the £154k on res mortgage to get the better deal, leaving the smaller mortgage where it is. It least it's transparant. And once the fixed term has finished, I'd be able to do as you propose and borrow against the let property and pay off the extra with the res mortgage.

Thought there was something slightly underhand in what I was proposing....

by **section 44** on Thu Oct 20, 2011 12:11 pm

Some banks don't like to merge homebuyer mortgages with homeowner loans (even where secured over the same property) because of the possible implications with say benefit payments to cover mortgage interest in the event of redundancy where only the homebuyer element should properly be claimed.

Having two different loans removes the uncertainty of whether or not you can properly claim a deduction for part of teh interest on a loan for dual purpose.