tax relief on commercial mortgage interest

by **niallh** on Thu Apr 14, 2011 7:50 pm

Hi

I had an existing commercial mortgage up until 2005. In 2005 I was advised that I could take out a larger commercial mortgage and use the money for whatever I want (i bought a house in France) and I would receive tax relief on the interest. I am a sole trader. My new accountant says that this is not possible - I can only claim the amount of interest that would have been payable on the original loan, not the increased loan as I did not use the money for the business. Is this correct?

Many Thanks

Niallh

by **pqtaxation** on Fri Apr 15, 2011 12:10 am

niallh wrote:Hi

My new accountant says that this is not possible

Hi Niallh

This matter has been discussed recently on this forum. As a business proprietor, you are perfectly entitled to withdraw your capital from the business. The deductibility of interest on replacement loans depends on the value of your capital account. This matter is covered at BIM45700

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

by **King_Maker** on Fri Apr 15, 2011 11:21 am

Your new accountant is in error.

The loan proceeds were used for a business purpose - namely, the re-financing of your capital account.

pqtaxation has already given the link to HMRC's Business Income Manual.

by **niallh** on Mon Apr 18, 2011 10:15 pm

Thanks for that.

On looking at my capital account it appears that the property has not been revalued since I built it in 1998 for the aforementioned £190k. Is it a simple matter to get this changed (I had a valuation of £650k done when I took the loan out)? And how difficult is this to do restrospectively (it started in Nov 2005)?

Cheers

Niallh

by **wamstax** on Tue Apr 19, 2011 6:42 am

be sure that you are not drawing more out of your capital account than is available from the capital balance brought forward etc. If your capital account goes overdrawn then you will not get tax releif on the full amount of any loan interest paid in the year.

bill@wamstaxltd.com
www.wamstaxltd.com

by **Incredulum** on Tue Apr 19, 2011 9:22 am

Your capital account should not take into account any upwards revaluations.

by **niallh** on Tue Apr 19, 2011 11:10 am

Thanks again everyone.

My accountant has just sent me this....

"Unfortunately you can't revalue your capital account - this is entirely dependent on trading profits you have generated. You can revalue property but this won't help you much. This is more often used in manufacturing etc where assets are often tied up as stock and work-in-progrss. Your healthcare business does not have those kind of limitations as it is a service industry and income is immediately turned into cash. In essence you have already extracted the maximum amount of profits so you do not need to take out a loan to get access to them, and correspondingly cannot claim any interest relief"

Should I now give up?

by **Incredulum** on Tue Apr 19, 2011 2:27 pm

niallh wrote: I can only claim the amount of interest that would have been payable on the original loan, not the increased loan as I did not use the money for the business. Is this correct?

This is not correct as the above posters have stated. However interest can only be claimed up to the value of the property when introduced into your business, so, as your accountant says revaluation will not help you.

by **wamstax** on Tue Apr 19, 2011 2:34 pm

Incred...... The man is a sole trader he is not a landlord and the allowability of any loan interest will depend on his capital account remaining in credit after all his money has been drawn. If he goes overdrawn then of course HMRC will assert that the loan is subsidising his personal spending and quite properly not allowable and to be apportioned

Hope this helps
bill@wamstaxltd.com
www.wamstaxltd.com

by **wamstax** on Tue Apr 19, 2011 2:41 pm

niallh - your accountant is quite correct if you have drawn all your realised profits and capital introduced in the past then you cannot increase your available capital by revaluing your assets. Any notional revaluation would in my view be more properly allocated to a "revaluation reserve" and not put to your capital account.

Of course if you earn more profits you could still manage to draw more money out of the business BUT you cannot get tax relief on money drawn from the business for personal purposes. While it is true that HMRC cannot stop you drawing all your capital out of the business they can certainly stop you getting tax releif on any loans that effectively meet your personal and private expenditure.

I hope that this helps and you need to fire whoever told you anything else. Believe your accountant and forget the pub talk. Alternatively if the information was provided by a mortgage broker or financial adviser - ditch them

bill@wamstaxltd.com
www.wamstaxltd.com