What interest payments are claimable - first property...

by **greenfield** on Fri Jul 29, 2011 8:40 pm

Hi,
I'm unsure what interest on "property loans" I can claim against my allowable expenses in relation to the first property I have ever let out.
If anyone knows I'd much appreciate it, it's a little bit unusual in that at one time it was my only property but I have never lived there and never intended on doing so...
I've put a similar example below although the amounts are changed to make it more comprehensible.

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 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.
5) The flat is rented out in December 2010.

If we assume that all the mortgages and loans were interest only what interest payments can I claim for the different months?
I'm unsure as to whether the "rental business" started when I first bought the flat, as I never intended on living in it, or when the flat was first let...
Thanks for any responses!

by **section 44** on Sat Jul 30, 2011 8:03 am

greenfield wrote:I'm unsure what interest on "property loans" I can claim

For the purposes of calculating the profits of your property rental business, you can claim a deduction against rental income for interest incurred on a loan to acquire, or refinance, a let property.

greenfield wrote:I'm unsure as to whether the "rental business" started

On the information provided, May 2010.

greenfield wrote:I complete the refurbishment of the flat in November 2010 and have it revalued at £150,000, the new mortgage is for £120,000

You have a buy to let mortgage of £120k on a property, acquired for £100k and revalued for £150k. In 2010, that is impressive. I take it that the mortgage is not in fact a homeowner mortgage? If so, that would clearly contradict your intention to let the property at the time of acquisition and mean that the following is incorrect:

greenfield wrote:I buy a new vacant flat, with the intention of letting it out once refurbished,

by **greenfield** on Sat Jul 30, 2011 11:58 am

Hi section 44,
Thanks for your answers but I'm still a little unclear.

If we assume that the rent received from November to end of tax year covers all interest payments and more...

In the months of May - October I think I can reclaim the interest payments I made on both the 80k mortgage and the 15k loan (as the total of these loans are less than the 100k purchase price).

I am unclear however as to how much of the "loans" I can reclaim the interest against, in November, December, January and so on.

If we assume the capital refurbishment costs were 25k, would I then be able to reclaim the interest on 125K worth of loans (the original 100k purchase price plus 25k of capital refurbishment costs)?

Or, could I reclaim up to the value of the property when it was first let i.e. the interest on up to 150k of loans (although as I only have 120k mortgage and 15k loan then the interest on 135k loans)?

By the way, the actual numbers are made up as the specific numbers are much more confusing.

Thanks again!

by **Tax Champion** on Mon Aug 01, 2011 4:45 pm

In the months of May - October I think I can reclaim the interest payments I made on both the 80k mortgage and the 15k loan (as the total of these loans are less than the 100k purchase price).

- Agreed.

Provided you can justify your valuation of £150k, you can claim relief for interest on loans of up to the value of the property - in your case, this would mean the re-mortgage of £120k plus the £15k. This is seen by HMRC as releasing the equity in your rental business.

by **Incredulum** on Mon Aug 01, 2011 5:16 pm

section 44 wrote:
greenfield wrote:I'm unsure as to whether the "rental business" started

On the information provided, May 2010.

Tax Champion wrote:Provided you can justify your valuation of £150k, you can claim relief for interest on loans of up to the value of the property - in your case, this would mean the re-mortgage of £120k plus the £15k.

Aren't we having our cake and eating it here? If the business commences in May '10 then the property is introduced at that date and no revaluation is possible for the purposes of the refinancing. If the business commences in November, then on what basis can a deduction be claimed for the interest prior to that date?

by **greenfield** on Mon Aug 01, 2011 8:52 pm

Thanks for your answers - I'm still unsure of the answer though :-)

So, sounds like the answer is definitely one of the following:

1) 100k - original cost of property when it enterred the "rental business".
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).
3) 125k - original cost of property plus subsequent capital refurbishment costs.

I have evidence to back up the valuation of "150k", 4 estate agent valuation letters and a surveyors valuation as used for the remortgage. Although if the answer is 1 or 2 then I guess this isn't relevant.

I've trawled through lots of information on the internet and read quite a few examples, but nothing I've found so far deals with this scenario exactly.

On a general level, is the interest on loans to make capital improvements an allowable expense against your rental income?

Cheers

by **section 44** on Tue Aug 02, 2011 10:42 am

section 44 wrote:You have a buy to let mortgage of £120k on a property, acquired for £100k and revalued for £150k. In 2010, that is impressive. I take it that the mortgage is not in fact a homeowner mortgage? If so, that would clearly contradict your intention to let the property at the time of acquisition

Presumably the mortgage is not a homeowner mortgage?

by **greenfield** on Tue Aug 02, 2011 4:08 pm

The numbers are all made up to make it easier to get across the point of the question.

I'm not sure how your question is relevant to the answer? Will whether or not the loan interest is against a homeowner mortgage or a buy to let mortgage or even an unsecured loan, affect whether or not the interest payments on those loans are allowable?

I wouldn't have thought that even if the loan was advanced as a homeowner mortgage, it would be enough evidence to convince the tax man that I had originally intended to live there?

by **Incredulum** on Tue Aug 02, 2011 4:20 pm

No amount of window dressing can change the facts of the case. If it is a BTL flat, it is a BTL flat.

However, if the evidence is such that the facts cannot be proved and indeed points the other way, then you may end up with a situation that you did not envisage.

by **greenfield** on Tue Aug 02, 2011 4:25 pm

It's a buy-to-let flat and I'm "happy" to pay the amount of tax that I'm supposed to, the problem is that I'm not sure what that is...
I didn't think the situation could be much worse with regards tax than the situation as it is, i.e. I bought it with the intention that it would be a buy-to-let flat - or am I missing something?
I'll either have to assume I can only reclaim the interest on the 100k or pay for some professional tax advice I guess...
Cheers