What interest payments are claimable - first property...

by **Incredulum** on Tue Aug 02, 2011 4:40 pm

As this is your first property HMRC accept:

greenfield wrote:the answer is definitely
2) Up to 150k - the "value" of the property when it was first let (although it would be interest on 135k, the size of my loans).

by **greenfield** on Tue Aug 02, 2011 5:20 pm

For those interested I have just spoken to a technical expert at the tax office, the lady told me I can claim the interest on the original 100k.
In addition, I could reclaim the interest on the 20k as long as when I agreed the loan with the bank the reason on the documentation for that loan is that I was using it for refurbishment of that property.
If not, then technically the interest against that 20k is not an allowable expense.
The revaluation was irrelevant.

The lady also told me that if someone was to revalue and then re-mortgage their own home and take, for example, 250k of additional borrowing out against their own home to purchase a buy-to-let flat, the interest on that additional 250k of mortgage against their own home is only an allowable expense IF they told the mortgage company that that was what the 250k would be used for... and it's on the documentation.

Sounds suspect and incredibly harsh to me... but that's what she told me... quite a few times as I didn't believe her...

by **greenfield** on Tue Aug 02, 2011 5:25 pm

Hi Incredulum,
I did mention to the tax office lady that it was the first time I had let a property but didn't stress it, it is possible she didn't consider this in her reply but I suspect not.
Why do you think that because its my first property the interest on up to 150k would be allowable? Obviously that would be great for me but, as you mentioned earlier, if it's entering my rental business when its first let, why would I be able to claim interest on it before it was rented out?
Cheers

by **Incredulum** on Tue Aug 02, 2011 5:53 pm

In my view it enters your rental business when you advertise it for letting. HMRC's published view is that it is when the first letting starts - although I am aware that they can agree much earlier dates.

Therefore it is the valuation when the first letting starts that apparently counts. http://www.hmrc.gov.uk/manuals/bimmanual/bim45700.htm example 2 being the justification used for this point.

Any interest expense prior to that point is pre-rental-business expenditure, which becomes deductible on the day the business starts.

Interest on any loan taken out wholly and exclusively for the purposes of your rental business is tax-deductible up to the value above. So on the 120k mortgage definitely as it is secured on the property. On the 15k personal loan as well IF that was also taken out wholly and exclusively for the purposes of your lettings business (you are unclear on this point) but presumably your bank account will show the cashflows reasonably convincingly. It is complete nonsense to say that the reason has to be on the documentation, however it is certainly helpful if HMRC were to challenge it.

If it were a second property, the lettings business would already have commenced so the interest would be restricted to a loan amounting to the capital cost plus enhancements plus any other costs e.g. bank interest/council tax incurred by your rental business. Of course if the first property were throwing off a profit the analysis would be different.

by **greenfield** on Thu Aug 04, 2011 12:18 pm

Hi Incredulum,
Thanks again for your responses.
With regards the justification being example 2 on http://www.hmrc.gov.uk/manuals/bimmanual/bim45700.htm, is there not a significant difference in that the person in the example originally purchased the house to live in it, some years later he decided he would rent it out so that is why its the value then that counts.
In my example I purchased the flat with the intention of letting it out, I never lived there or intended to...
That seems a significant enough difference to me to make the example meaningless in my case, what do you think? Are you aware of any other justification?
Thanks

by **Incredulum** on Thu Aug 04, 2011 12:47 pm

I realise the example is a bit different, but it all comes down to the date on which your property business commences, and it is the value on that date that counts as that is the date that your investment is introduced to the business.

HMRC's published view is that the property business commences when your first tenant's lease commences; a widely-held view that they can be persuaded to accept is that it potentially commences when you start advertising it for letting, and certainly when you sign your first lease - even if it isn't anywhere near complete at that date (so even if it's a hole in the ground).

by **greenfield** on Thu Aug 04, 2011 7:53 pm

Thanks again Incredulum, much appreciate your responses.

Just read http://www.hmrc.gov.uk/manuals/pimmanual/pim2505.htm which says the same as you, i.e. that the rental business began in November.

With regards it being the "Value" of the property when it is first let - that sounds great to me, is that definitely the case when it's a first property - I can't find a pim on it...

I tried to make all the numbers easier to understand before, in truth the mortgage was an offset mortgage. It was one large offset mortgage facility secured against two properties, the one I lived in and the new buy-to-let one and then following the sale of my home, the offset facility was reduced and secured just against the buy-to-let flat, (6 months ago I moved it on to a fixed rate standard buy-to-let mortage).

This means that my offset balance (size of the loan) went up and down every day, so I am trying to find out what the cut off point in the offset mortgage was for claiming the interest.

Are you aware of offset mortgages being treated any differently to other loans?

So, to summarise, you think the mortgage interest on 95k is claimable until Nov/Dec (as long as the 15k is wholly and exclusively), from Dec the interest on 150k is claimable as an allowable expense?

I've repeated the example situation below.

1) I owned and lived in a flat at the start of April 2010.
2) I buy a new vacant flat, with the intention of letting it out once refurbished, for £100,000 in May 2010 using a mortgage of 80k, I also have a separate loan of 15k.
3) I sell the flat I live in in August 2010 and rent accomodation.
4) I spend 25k on the refurbishment of the flat.
5) I complete the refurbishment of the flat in November 2010 and have it revalued at £150,000, the new mortgage is for £120,000 and I still have a loan for 15k.
6) The flat is rented out in December 2010.

Thanks again! :-)

May I ask how come you know so much on property tax Incredulum?

by **Incredulum** on Fri Aug 05, 2011 2:49 pm

greenfield wrote:With regards it being the "Value" of the property when it is first let - that sounds great to me, is that definitely the case when it's a first property - I can't find a pim on it...

I doubt there is one. But when it's the first property there is no property business before you start.

I tried to make all the numbers easier to understand before, in truth the mortgage was an offset mortgage. Are you aware of offset mortgages being treated any differently to other loans?

Oh great. They certainly make life more interesting (when they are part business, part private use). And if you pay off capital then you have to argue whether it was against your home or the rental property. Though in your case it looks simple as the capital repaid was obviously against the home, not the BTL.

So, to summarise, you think the mortgage interest on 95k is claimable until Nov/Dec (as long as the 15k is wholly and exclusively), from Dec the interest on 150k is claimable as an allowable expense?

Between purchase and Dec, if your refurb costs are met by bank loan then they too add to the allowable element.