Buy to let mortgages on an inherited property

[u08394]

I have recently inherited a number of rental properties, these properties currently have no outstanding finance. Is it possible to refinance and to offset the mortgage interest payments against the rental income.

[Instinctive]

Depends what the loan money is used for. No, if you use the money for personal purposes. Yes, if you use the money for improvement expenditure on inherited properties. If you use the money as deposits to buy other properties and let these on the same basis as the inherited properties, the loan interest can be offset against the rent from the newly bought properties. If these produce a loss, the loss may be set off against the profit from inherited properties, or alternatively, losses can be carried forward and set off against rental profits in later years.

Hope this helps.

[Huw Williams]

The answer may well be yes whatever you use the money for, providing you do not borrow more than the value when you started to let them.



Huw Williams
Nottingham

0115 914 6846

enquiries@huwwilliams.co.uk

[Lambs]

Eh? Huw, I am intrigued....do tell! What's the 'qualifying purpose?'

[Huw Williams]

Have a look at the article

"Investment Properties, Reducing Your Mortgage And Interest Relief
December 2004"

You can get to it through the "Property Tax" link on the right hand side of this page.


Huw Williams
Nottingham

0115 914 6846

enquiries@huwwilliams.co.uk

[u08394]

In the 18 September 2004 edition of the Financial Times, Maurice Parry-Wingfield drew attention to the fact that paragraph 45700 gave landlords the opportunity to release equity from their investment properties and offset the interest regardless of what the equity release was used for.

The only restriction is that the equity release cannot be greater than the market value of the property when it is brought into the letting business. If the property had been originally bought for letting, this amount would be the purchase cost of the property.

as I've not paid anything for these properties does this still apply. Can I release equity upto the market value when the properties where signed over.

[Huw Williams]

That appears to be what the Revenue are saying, so that you should be able to remortgage up to the value of the properties when you inherited.

Whether or not that is a good idea is a separate issue. Whilst you can offset the interest, can you afford the mortgage repayments (which will be a mix of capital and interest)? Do you make enough money to get tax relief on the interest element....


Huw Williams
Nottingham

0115 914 6846

enquiries@huwwilliams.co.uk

[Lambs]

Huw, thanks for your response. I am aware of the article, but I had originally inferred that the point was to get your mortgage rolled out before the lettings business commenced, as implied in the initial example. (Or rather, as per the initial example: I cannot say whether or not the relief turns on this particular point).

The alternative, - somewhat akin to "re-mortgaging" your capital account in an existing business, is something which, I was given to understand, would result in swift retribution from HM Inspector!

(You know what I mean: Capital account £200k in credit, withdraw from business, pay off home mortgage, take out new mortgage to introduce working capital allowed under s360 et seq.)

How do you distinguish?

Regards

Lambs

[Huw Williams]

I had not thought about the remortgaging of capital accounts for some time, but I do not think it is quite the same issue.

We are talking about a sole trade business so I do not think s360 can be in point (am I right in thinking you can only loan money to a partnership or company, not to a sole trader?)

We are talking about extracting cash, not circulating it to improve the tax relief.

So it is simply drawing down on your capital account and gearing the business up. Providing you do not go too far (ie overdraw your capital account) the Revenue should not get upset. But if you go too far part of the interest is then financing your drawings (and not the business) and there is no tax relief on it.

The question then is what is your "capital account" which is where the property values come into it. And here the Revenue appear to me to be restricting you to borrowing against the historical value and not the current value. I would have thought there is an argument for saying you should be able to borrow up to the current value of the property - but it is not an argument I would like to take on.



Huw Williams
Nottingham

0115 914 6846

enquiries@huwwilliams.co.uk

[Lambs]

Huw, you are of course absolutely correct, my apologies for being lax! ("It's Christmas," I hear you mutter, "but come on Lambs, leave the sherry and the mince pies for a while longer, eh!")

Firstly, let's be more precise about the manner of granting the relief, as hovering around s360 is totally spurious. The closest I've ever got is interpretation by the specific exception referred to in s.74(1)(f), which, in respect of allowing deductions from trading income, states that deductions of capital etc., are not allowed ... but NOT so as to disallow interest. Schedule A, of course, now follows these rules.

However, if we take one step back and look at s.74 in principle, this is where we get "wholly and exclusively" from. This, then, is my point:

if the lettings business is ongoing, how can it be argued that the extraction/personal application of the capital is in any way business-oriented? If the capital is applied to finance the acquisition of further rental properties, then fine, but if it's for non-business-oriented purposes, then surely a deduction for any interest fails the general s.74 provision?

Of course at this point, you're saying "That's exactly why the article is important." Fair enough, but to my eye the example in the Revenue Manual doesn't meet this head on, but gives an example where some of the capital is diverted for non-business purposes, BEFORE the lettings business commences. To my eyes, this is different, because it's saying that you can arrange your finances however you like BEFORE YOU START, in accordance with the laudable principle as set out in the Duke of Westminster case, such that you move private capital around beforehand, but are still introducing (reduced)capital into the business at the point at which the lettings business commences. That's how I interpret the example in the manual, which of course does not appear to agree with other peoples' interpretation.

Which is therefore why I raised the question, albeit somewhat poorly, on what basis do you distinguish between the "re-mortgaging of capital account" scenario, where one might say that he is claiming loan interest relief for business purposes, and the Revenue say, "Oh no you're not?"

Like the seasonal Panto' feel at the end?

Merry Christmas!

Lambs