Ways to set off interest on buy to let mortgage against tax?

[Matt2003]

My elderly father in law has raised a buy to let mortgage on a property which is let to tenants. The proceeds of the mortgage, approx £250k, were given to us to assist us in purchasing our own home. I understand that he cannot set off the interest on the buy to let mortgage against tax. Would the answer be for us to purchase the property from him on our own buy to let mortgage, pay stamp duty at 1% and then set off the interest against the rent?

On a related point, he is in the process of purchasing a lease extension under the Enfranchisement Act at a premium of an additional £100k. Could the interest on a loan to pay the premium to buy the lease extension be set off against the rental income for tax?

I would be most grateful for any help. I think I will need to instruct an accountant to deal with this.

Matthew London

[taxman]

Hello Matthew,

Your query raises a number of issues that i would be pleased to assist you with.
In order to provide detailed tax advice further information concerning a number aspects will be required.
By way of a brief summary, the following points should be borne in mind:

- As you correctly stated the interest on the buy to let mortgage raised by your father in law will not be available for offset against rental income. Interest payble must be wholly and exclusively for the purpose of the rental business. Therefore were the Inland Revenue to look closely at the transaction relief would be denied.
- The purchase of the property by you/your wife would have significant tax implications including Capital gains tax. The connected party rules will be relevant and any disposal would be at market value.
- Interest payable by you would be available for offset, however care should be taken, and the Inland Revenue are likely to look closely at the transaction.
- The Inheritance tax implications of the transactions could be potentially significant, particularly the gift of £250,000.
- The financial requirements of your Father in Law should also be considered, ( is he dependent on the rental income?)
- Stamp duty planning could be possible depending on the circumstances of the transaction.
-The interest payable on the lease premium should be allowable for tax, however I have known the Inland Revenue to question such deductions on a technical basis. Having said this, it is usually possible to justify the deduction as relating to the future continuance of the rental business.

As you can see the income tax, capital gains tax and inheritance tax consequnces of your query could be significant for both you and your father in law. Given this I should require further details before providing more detailed advice.
However, if you would like me to assist you in this matter, I would be pleased to provide you with more detailed specific advice for only a nominal charge.

If you would like to pursue this matter, please e-mail me at the above address and I shall contact you to discuss the issues in more detail and the further information that i will require.

Kind Regards,

A Opt
Tax accountant and Chartered tax adviser

[steve@nunn-hayward.c]

Hi Matthew,

In my view, the initial flow of funds and documentation should be carefully examined. It is not clear that relief has yet been lost to your father in law (FIL). There is still a chance that the facts may save the day.

Did your FIL "Give" or has he "loaned" the funds to you (with or without interest)? A gift could have Inheritance tax (IHT) implications down the road, especially in view of your comments concerning your FIL's age.

I am also not clear as to the actual Value of the property as opposed to the loan. The usual maximum a lender will look at is around 70%. This implies a cost of circa £350,000. The point here is that an aquisition by you if done in a staight forward manner will trigger Stamp Duty at 3% not 1%. There are ways to mitigate this is felt appropriate.

On the lease extention point your FIL should get relief, but I would suggest he waits until your initial point is sorted.ie if he is going to sell/ transfer the property could it be better aquired by the "new" owner?

In this connection, and with regard to the Financial security of both your FIL and yourself, it might be appropriate to consider aquisitions/gifts using a trust or Limited company. These can acheive the tax relief objective you initially posed as well as address some of the other issues raised above.

I would be pleased to speak with you to assess how matters can be best taken forward.

Regards

Steve Cook, ATII
Tax Partner
Nunn Hayward, Chartered Accountants
01753 888211