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Where Taxpayers and Advisers Meet

Loans in Excess of Purchase Price

vector
Posts: 39
Joined: Wed Aug 06, 2008 3:42 pm

Loans in Excess of Purchase Price

Postby vector » Thu Nov 05, 2015 6:12 pm

Rule is your claimable loan (interest on) cannot exceed purchase price. But take this example. Let's say you havea 95% LTV ( £95K borrowing against £100k purchase) You refinance and there is a product fee of £2k which you add to your mortgage as it is a cost effective way of borrowing. Your borrowings are now £97k. The interest is deductible as it's a cost of finance. Let's say over a few years you do this a few times and now VTL is £103k over £100k. The rule still applies ?

bd6759
Posts: 3297
Joined: Sat Feb 01, 2014 3:26 pm

Re: Loans in Excess of Purchase Price

Postby bd6759 » Thu Nov 05, 2015 8:06 pm

Rule is your claimable loan (interest on) cannot exceed purchase price.
That is not the rule.
The rule is that interest must be paid on money used for a purpose of the business.

DCF
Posts: 36
Joined: Thu Mar 19, 2015 12:31 pm

Re: Loans in Excess of Purchase Price

Postby DCF » Fri Nov 06, 2015 10:57 am

interest paid on loan used to purchase property Is currently deductible but new rules come in from April 2017. Product fee would be tax deductible but since you have technically borrowed the product fee, you cannot claim a deduction for the product fee until you have paid it. Interest paid on the produce fee is deductible because the product fee is a expense of the BTL business.

Ian McTernan CTA
Posts: 1232
Joined: Wed Aug 06, 2008 3:02 pm
Location: Bedford
Contact:

Re: Loans in Excess of Purchase Price

Postby Ian McTernan CTA » Thu Dec 03, 2015 12:20 pm

Product fee is a cost of finance claimable against rent under the current rules. Unsure as to how these will be treated in 2020, looks like it might be restricted to the 20% tax credit (but I'm sure some whizzes will work a way around that).

In your scenario, all the interest is allowable against the rent, as all the funds have been borrowed for the purpose of the 'business'.

The rule is better explained by this example:

Property bought for £100k, 75k mortgage. Immediately rented out.

1.
Ten years later, owner decided to go on holiday, remortgages to 100k, spends 25k on a nice holiday. The interest on this loan is totally allowable against the rental income, purpose of the funds isn't relevant. As far as the rental business is concerned, you have replaced one type of finance (owners funds) with a different type, mortgage.

2.
A year later, (the property is now worth £300k), he remortgages to 200k. Purpose is now paramount as we have exceeded the original cost of the property when it first rented out (NB: NOT necessarily the purchase price, common fallacy!). let's say he spends 25k on another holiday and uses 75k as a deposit on a second BTL property. he must now disallow 25/200% of the total interest when computing his profits as 25k was not used for a qualifying purpose.

It still amazes me how many accountants and HMRC employees fails to understand scenario 1. and seek to disallow the 25k there.
McTernan Associates Ltd
Chartered Tax Advisers
Bedford
Email through link on website:
http://www.imcternan.com

Incredulum
Posts: 2732
Joined: Thu Dec 03, 2009 5:35 pm

Re: Loans in Excess of Purchase Price

Postby Incredulum » Thu Dec 03, 2015 1:49 pm

Product fee would be tax deductible but since you have technically borrowed the product fee, you cannot claim a deduction for the product fee until you have paid it.
I am not aware that the deductibility of the costs of raising loan finance is subject to the cash basis, can you please refer me to the legislation that applies?

Generally for property businesses GAAP applies, and you would normally amortise the product fee over the life of the loan and the tax deductibility follows that. There may be an argument that you could write it all off in the first year under GAAP.


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