Tax relief for BTL using a new main residence mortgage

by **martintax** on Tue Jun 30, 2009 10:47 pm

Dear TaxW,
I am in the process of raising a second mortgage on my main residence to fund the purchase of a buy to let. I read recently that I can still claim mortgage tax relief on this new loan provided I can show it was used for the purchase of the BTL. The big advantage here is the int rates are a lot lower with effectively a huge deposit.
To do this should I ensure that the loan goes directly from the lender to my solicitor's bank account, or is it ok to go firstly through my current account and then to the solicitor? (the bank has indicated that they would normally send the monies to my current account for second mortgages). Im just worried this may look wrong to the revenue.

It is slightly more complicated because the new mortgage will be for an amount greater than the BTL purchase price, to cover some renovation work. The loan will be for 80k and the house price is 69k, and so the bank would normally send the full amount at 80k. How do I deal with splitting this up for mortgage tax relief purposes? Can I just divide up the interest in a 69/80 ratio to claim just the purchase loan amount? Hope you can help!
Many thanks
Martin in Cambridgeshire

by **robbob** on Wed Jul 01, 2009 9:08 am

Hello Martin

If the renovations are improvements rather than revenue repairs then interest will be allowed on borrowings up to the full cost price + value of improvements as your effective cost price will be ther higher amount.

Further to this there is scope for claiming interest on loans for working capital providing you do not take monies out of a business - see here for further advise.
http://www.hmrc.gov.uk/manuals/bimmanual/BIM45715.htm

I would not be worried about depositing funds into your personal account for an interim period providing you can show the documentation to the taxman if asked.Things may be different if you used these funds for another use for any sustained period eg paying down a mortgage or reducing a massive overdraft as it MAY not then be obvious to the taxman as to why you took out the loan.

by **Peter D** on Wed Jul 01, 2009 10:31 am

You can claim interest on any loan up to the value of the property when 'First Let' so a decent valuation ( surveyor ) will provide proof of the value if HMRC question it. I assume you declared the reason for the mortgage to the provider. Regards Peter

by **martintax** on Wed Jul 01, 2009 12:26 pm

Hi Robbob and Peter,
Thankyou very much indeed for clarifying the situation!
My mortgage lender has been made aware that the loan is to purchase a second home and this has been recorded. The extra 11k will be used for re-wire, central heating (which is doesn't have at the moment) , new bathroom; in fact a full refit is required really. As you have said, I should revalue after the work has been done to show that the 80k loan is correct at point of letting.
Best regards
Martin.

by **martintax** on Wed Jul 01, 2009 12:40 pm

Hello again Robbob,
I forgot to add that this will be my second BTL property and I am considering buying some more. I'm not setup as a business, just a private investor, but it sounds like I should get some advice on if setting up a business shell for this venture may provide some further advantages?
Many thanks
Martin.

by **robbob** on Wed Jul 01, 2009 12:59 pm

Hello martin

It is hard to provide any advise as to whether this kind of business is best done as a company or as an individual as this will depend on individual circumstances and current/future tax rules.
I would recommend taking some advise or doing some research when you get to multiple properties so you are well informed as you can be.