Morgage interest deductible

[miro2021]

I know similar has been asked before about offsetting PPR mortgage interest against a rental property and the consensus seems to be NO. But could someone please clarify the following for me?

I owner/occupied a property for 7 years then remortaged it and used the money as a deposit on a new home and rented the old one out.

The amount of mortgage I could get on the (now)rental property is limited by the rental income which is very low in relationship to the property value.

Because of this in order to keep the old property on I had to get a mortgage of £x more on my new home than I would have if I had been able to get a bigger mortgage on the rental property.

Can not that extra £x be considered to have been taken out solely for the purpose of financing the rental property?

[jpcentral]

I don't know why you think the consensus is no. A loan can either be unsecured or secured on any property (or other asset) and, so long as it is for a qualifying purpose, which includes withdrawal of capital from a rental business, the loan interest is allowable.

John Perry
Central Business Services
Loughborough
www.centralbusiness.co.uk

[AndyLevett]

I concur with Mr Perry

[Peter D]

Yes I wonder where he got the consensus of a No. A little odd. Having said that I have heard reports of 'Mortgage Advisors' detailing same. Regards Peter

[Instinctive]

Let us assume that he borrowed £100,000 against the former home and used this as a deposit to buy a new home.

The former home is now let so the interest on £100,000 is allowable as an expense of the lettings business.

However, he also needed to take out a mortgage of say £75,000 to complete the purchase of the new home. He then borrowed another £50,000 to complete an extention to his new home.

Can someone please tell me why any of this £75,000 or the £50,000 is considered to be for a qualifying purpose of the lettings business?

There may be ample credit balance on a lettings business capital account.

But can one simply pretend that some or all of the £75,000 and the £50,000 loans represents a drawing on the lettings business capital account?

How can any of these £75,000 and £50,000 loans be entered on the lettings business balance sheet?

I remain to be convinced.

[miro2021]

Sorry - I got that idea it wouldn't be allowed from reading other threads here and elsewhere..

I'll clarify my situation so you have the exact facts..

I bought a flat to live in in 1996 for £80,000

Lived there until 2003 at which time I bought a new flat for £237,000 and moved.

The remaining mortgage on the first property was around 40K so I took a 'further avdance' from the same lender of 30K and used that plus another 30K savings as a deposit on my new flat with a mortgage of 180K

I would say the first flat at the time I began letting it was worth 170-190K but because the monthly rent is only £600 I would be limited what I could borrow as I believe buy-to let require a loan small enough that the monthly interest is only 4/5 of the monthly expected rent.

I could see at the time that I would be best to have as big a mortgage on the rented property and minimum on my PPR for tax reasons, but I just presumed I'd only be able to offset the interest on my 40K (remaining on my fist mortgage) and 30K (the further advance used to part-fund deposit on new PPR).

I'm now thinking IF I could have got a bigger buy-to-let mortgage on the first place I would have (the property by then was worth 170-190K but I only have it mortgaged to 70K because of the low yield)

If I could have I would have borrowed maybe 120K on that and only had to get a 130K mortgage on my new PPR instead of 180K! The rental flat would be probably making a loss but overall I would be better off..

..BUT - would the taxman see it the way i want him to and let me offset the proportion of interest on 50K of my 180K PPR mortgage???

(I really don't want to be storing up trouble for myself in the future)

[jpcentral]

Instinctive

I don't see why you use the word "pretending".

Consider a slightly different situation. I set up a sole trader business selling widgets. To fund the business I introduce £250,000 and this is shown as owner's capital. A few years (months or weeks) later I decide I need that money for some other purpose and I go to my bank who agree to lend me £250,000. I take the money from the bank and use it to repay my £250,000 thereby replacing my owner's capital with loan capital. I assume you accept that this scenario is acceptable and I assume that you accept that the bank loan can be either unsecured, secured on stock, secured on business assets, secured on a commercial property, secured on my private residence, secured on my mother's/brother's/sister's/friend's private residence etc etc.

What really is the difference between that scenario and a letting business? The security doesn't matter - it is the intent. If it is the intent of the loan to repay owner's capital it doesn't matter how or if it is secured. The purpose of a loan can also change and even HMCE give an example of a loan originally taken out for a private purpose which becomes a business loan. I can't see what the problem is in entering such loans on a balance sheet provided it is properly documented.

John Perry
Central Business Services
Loughborough
www.centralbusiness.co.uk

[Instinctive]

John,

The main loan is used to purchase the new home.

We now wish to treat this as if it was actually used to withdraw the owner's capital from his/her lettings business.

I use the word 'pretend' in the above context, ie we are pretending that the loan was for a different purpose than was actually the case.

I agree with the 1st scenario in your reply.

However, the difference between that and the query in point is that:

(1) In your example, the bank has presumably agreed to lend the money to the business.

(2) In your example, the bank has presumably paid the money into the business account.

(3) In your example, the proprietor has presumably drawn a cheque out of the business.

In the query, the lender has specifically agreed to make an advance for the purchase of the new home and presumably sent the loan monies direct to the solocitor who has used it to pay the vendor. The money has been applied directly for the purchase of the new house and not to release the owner's capital from his lettings business.

Tp take your example one step further, any business person who has a credit balance oh his capital account could enter his house mortgage on his balance sheet, debit his capital account to complete the double entry, and claim that the mortgage interest is allowable as an expense of his busincess.

You conclude by saying: ''I can't see what the problem is in entering such loans on a balance sheet provided it is properly documented.''

I fully agree, but the loan has to be properly documented indicate that it is for the purposes of the lettings business. Then it doesn't matter what it is secured on, or not secured at all.

But can you put a new mortgage to buy a new home in the same category?

[King_Maker]

My initial reaction is that I agree with Ramnik.

In the current circumstances, the allowable interest is restricted to loan(s) of £70,000.

That does not mean that with symapthetic lender(s), this could not be increased to (max?) £190,000 (assuming this to be the value of the 1998 flat on commencement of the letting business). It might be necessary to ensure that section 787 ICTA 1988 does not preclude the deductability -as befell an accountant attempting a "circular" capital re-arrangement scheme with his wife (Lancaster v.CIR).

[Aldur]

If the loan obtained on the PPR isn't for a specific purpose (ie purchase of 13 Acacia Avenue), but is for a general purpose (such as 'equity withdrawal' or even better 'business funding') then there is no reason why an individual cannot repurpose a loan from his personal balance sheet onto the balance sheet of a business that he runs - whether that is a property business, unincorporated business, or via Section 360 relief a business run by a close company owned by the individual.

Why shouldn't a simple journal work in these cases? There is no authority preventing such a transaction.