CGT ON OLD HOME

[vera1965]

Bought house one in 1990 £85000
paid mortgage by 2000
Obtained btl mortgage in 2007 £200,000 and rented out till 2011.
Moved back in 2011 till now.

2007 -2011 bought another house two but didn't settle and moved back to original house .

Visited taxman who stated btl mortgage interest payments were not a allowable expense against rent as the £200k was deposit for house two.
And cgt payable on house one.
Any help thank you

[King_Maker]

Have you read HMRC's Help Sheet HS283 - it's on their website?

CGT on House 1 could arise depending on sale price and date.

Tax Inspector could be wrong on the deductibility of mortgage interest.

[PaulR986]

If I read it correctly you used the btl mortgage to buy your own residence rather than one to let and it is on this basis that the Inspector, I would imagine, said the interest payments are not allowable.

I accept that buying the new house put you in a position to let the old one, however, so would have renting a property yourself and your rent would not been allowable. In a nutshell it was the actual purpose for which the funds were used that is important.

If I read incorrectly - please ignore the above.

[LozaACCS]

It is not the actual purpose for which the funds are borrowed that is important.
If the borrowing was against property 1 which was at that time let out (or intended to be let) then any borrowing up to the value of the equity at the time the property is introduced to the property business is deductible whatever purpose the loan is used for.

[wamstax]

As regards the withdrawal of funds "from your property letting business" it is not for HMRC Inspectors to tell you what you can do with your drawings from your business.

If for example you decide to finance your start - up property letting business ( note this would be a business but not a trading business) by the introduction of a property worth £300K then the opening balance sheet of the business would be

Creditors - Capital Account of the Proprietor £300K Assets - Property - £300K

As time goes on the rental profits (i.e. rental income less revenue expenses) would be added to your capital account so assuming no other matters end of year 1 where you drew out £2,500 for yourself over the year might be
Liabilities
Creditors - Proprietors Capital account b/f 300,000
Add Profit (say) 10,000
Less Drawn 2,500
Net Capital Account 307,500

Assets
Property 300,000
Cash at Bank 7,500

Net Assets 307,500

So nobody would have any problem with that and equally nobody can have any problem if you decide that in running your business you are going to make it pay for itself by for example taking out a loan to either wholly or partly pay for the property that you provide to the business.

In the latter situation the position might be represented at the end of year one when you take out a loan of £200,000 during the year on which interest paid is say 6,000 for the year as follows:-

Liabilities
Creditors - Proprietors Capital account b/f 300,000
Add Profit (say) 4,000 (the previous profit of £10,000 would be reduced by £6,000 interest)
Less Drawn 202,500
Net Capital Account 101,500
Third Party Loan 200,000
Net Liabilities 301,500

Assets
Property 300,000
Cash at Bank 1,500 ( interest of £6,000 would reduce the bank balance compared to previous example)

Net Assets 301,500

So again nobody can have any problems with that and the taxable rental profits have also been reduced by £6,000.

I agree that the HMRC Inspector is wrong and he should be referred to his HMRC Revenue Guidance manuals where he will find and experience some learning to your mutual advantages ( you'll get the tax relief for the interest you're entitled to and he'll correct his lack of training and knowledge).See the following link http://www.hmrc.gov.uk/manuals/bimmanual/BIM45700.htm

If you get any difficulties always pleased to help clients with reasonable fees anywhere in the UK

[King_Maker]

Yes, Example 2 at BIM45700 on HMRC's website is the usual situation where the owner lets out his/her PPR (Principal Private Residence).

[Ian McTernan CTA]

The allowability of the interest in this case is always one of my favourite topics, as I was involved along with others in making the IR change their guidance to what it is today. Sadly many revenue officers (there aren't many Inspectors these days) still don't understand this basic point.

Provided the loan is not more than the value of the property when it was first rented out the whole of the interest is allowable against the rental income, no matter what you do with the money. If you borrow over that value then it becomes a case of what did you use the money for- for instance if you borrow an additional £50,000 and use if as a deposit on a new BTL, then that is allowable interest against your rental 'business'.

[section 44]

It is not the actual purpose for which the funds are borrowed that is important.

I don't agree. The opposite is fundamentally important.

[King_Maker]

It is not the actual purpose for which the funds are borrowed that is important.
If the borrowing was against property 1 which was at that time let out (or intended to be let) then any borrowing up to the value of the equity at the time the property is introduced to the property business is deductible whatever purpose the loan is used for.

Like section 44, I think both statements are not entirely accurate.

Sentence one is just wrong. Purpose is the essential point.

Sentence two is not 100% accurate, as the loan does not have to be secured at all - let alone on the let property.

[section 44]

Sentence two is not 100% accurate

Indeed. When read in conjunction with statement 1 it suggests that it how the loan is secured rather than purpose which is important - nonsense and there's plenty of commentary around both points.