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Where Taxpayers and Advisers Meet

Self assessment

Dev_1
Posts:53
Joined:Sun Jun 18, 2017 4:00 pm
Self assessment

Postby Dev_1 » Thu Jan 04, 2018 12:21 pm

Hello,

Thank you for finding the time to read this post. I was wondering if anyone can provide some advice.

My mother has a buy to let property which was purchased initially without a mortgage many years ago. Last year she re-mortgaged this property to raise £195,000. When the property was first purchased the value of the house was £140,000. Now the value of the house is £450,000.

The mortgage is interest only, would the mortgage interest be deductible for her self assessment tax return.
The £195,000 which was remortgaged was provided to me in buying my own house where my mother also lives with me.
This has allowed her to place her old home on rent as she now resides with me.

The only thing I can say is that by remortgaging this has enabled her to place her other house on rent adding an extra house to her buy to let portfolio as she has moved out. She has also spent a large amount of money on the old property in refurbishment the property where she has moved out from & adding an extension but this was whilst we were living there as our family Home but then by adding the extension & refurbishment this has enabled her to secure better rent.

Any guidance will be greatly appreciated.

robbob
Posts:3228
Joined:Wed Aug 06, 2008 4:01 pm

Re: Self assessment

Postby robbob » Thu Jan 04, 2018 1:35 pm

What was the market value of the property when first rented out? - best estimate should do
What is the value of capital improvements (booked for capital gains tax purposes not claimed as a profit and loss) done after the property was first rented out.
Presumably once rented out it has never been lived in again?

Dev_1
Posts:53
Joined:Sun Jun 18, 2017 4:00 pm

Re: Self assessment

Postby Dev_1 » Thu Jan 04, 2018 2:16 pm

Hello,

Thank you for your reply.

So the property which has been remortgaged for £195,000 has never been lived in by us as a family.
It has always been a buy to let. When purchased there was no mortgage it has only been remortgaged in 2016 for the above amount.

As mentioned we as a family were living at another address as our family Home. Whilst living there we spent a lot of money extending it. It was only in 2016 when I got another home and we all moved into the new property. So our old home is now a buy to let with no mortgage, the mortgage is on the first mentioned property.

Essentially money spent on our own home back in 2008 whilst living there, only in 2016 did we move out and got tenants in.
But as stated by my mother moving out this has meant she had more income from her old property which she rents now. However the remortgage on the other house which we have never lived in went to purchasing our new Home now.

I hope this makes sense, thanks for your reply again.

Dev_1
Posts:53
Joined:Sun Jun 18, 2017 4:00 pm

Re: Self assessment

Postby Dev_1 » Thu Jan 04, 2018 7:18 pm

Hello,

Are you able to advice as we are anxious due to the deadline fast approaching.
Sorry to be a pain any help is greatly appreciated.
Regards

bd6759
Posts:4262
Joined:Sat Feb 01, 2014 3:26 pm

Re: Self assessment

Postby bd6759 » Thu Jan 04, 2018 7:44 pm

Is this correct?

1. Your mother buys property A for £140,000.

2. Your mother lives in Property B

3. Proprty A has always been rented out

4. Your mother has borrowed £195,000.

5. The money was given to you to buy property C

6. Your mother has moved out of property B, and into property C

7. Property B is now being rented out.

8. Your mother has no other properties.

Dev_1
Posts:53
Joined:Sun Jun 18, 2017 4:00 pm

Re: Self assessment

Postby Dev_1 » Thu Jan 04, 2018 8:00 pm

Correct spot on.

bd6759
Posts:4262
Joined:Sat Feb 01, 2014 3:26 pm

Re: Self assessment

Postby bd6759 » Thu Jan 04, 2018 8:37 pm

The interest paid on £140K should be allowable.

This is because your mother "gave" a property worth £140K to the business. The balance sheet would show assets of £140,000, represented by capital account £140,000. Your mother is entitled to withdraw the funds in her capital account. To do this, the business can borrow money.

The balance sheet will now look like this: assets £140,000, liabilities £195,000, net assets -£55,000, represented by capital account -£55,000.

Because the capital account is overdawn, the interest on the liabilities is not wholly allowable.

Dev_1
Posts:53
Joined:Sun Jun 18, 2017 4:00 pm

Re: Self assessment

Postby Dev_1 » Fri Jan 05, 2018 6:50 pm

Hello,

Thank you very much, my apologies for not getting back sooner.
Can I please check my understanding now to ensure it is all correct.

In relation to releasing money from her capital account, are you saying it does not matter what she does with this money?, would this not mean that everyone with buy to let properties would be do the same in relation to releasing money from their capital accounts & say that they are spending it on anything?.

In relation to the buy to let business are you saying that because it is a business she would be able to release this money from the business by mortgaging this buy to let property even though when initially purchased it had no mortgage many years ago & now she has mortgaged it for £195,000?. i confirm again that the property has always been a buy to let & we have never lived in it.

When you say liabilities of £195,000 i presume this is a liability in relation to the "business"?

Am I correct in assuming that the total amount on which interest is charged cannot exceed the purchase value of the buy to let property at the point of purchase when it was first introduced to the business?. Is this why its not wholly allowable i.e not the full mortgage amount of £195,000 & just £140,000?

i am sure what you are saying is absolutely correct & don't doubt your answer at all, I just don't want to be caught out, i have given full disclosure. It seems strange claiming the interest relief on a property which was financed only recently however was punched years back & the amount it was remortgaged for was not even put back into the business in fact it was transferred to the purchase file to purchase my new property.

Many thanks again & hope you can clarify this point for me.
kindest regards

bd6759
Posts:4262
Joined:Sat Feb 01, 2014 3:26 pm

Re: Self assessment

Postby bd6759 » Fri Jan 05, 2018 9:09 pm


Dev_1
Posts:53
Joined:Sun Jun 18, 2017 4:00 pm

Re: Self assessment

Postby Dev_1 » Sat Jan 06, 2018 9:48 pm

Thats great, many thanks for your reply its greatly appreciated.


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