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.