Use of residence to fund mortgages on let properties. Treatment of interest

[hermit]

(1) Residence bought 1999 for £105k, with mortgage (mortgage 1) of 60k. Interest on 60k clearly not allowable for tax purpose
(2) Flat no 1 bought for letting 2001 for £80k. Mortgage on residence increased(same lender) to 130K ie increase of 70K, all secured on residence. Interest allowable on 70k, not allowable on 60k
(3) Flat no 2 bought for letting 2002 for 65k. Earlier mortgage of 130k repaid. New mortgage (mortgage 2) obtained from different lender of 200k, secured as to 160k on residence , 40k on flat 1.
All loans are interest only.
The nature of the security given is not relevant in determining purposes of loans for tax. Following Clayton's Case (see HMRC instructions EIM 26260 penultimate para. and EIM 26261 ) the oldest part of mortgage 1 will be deemed to be repaid first by mortgage 2 ie the 60k on residence
This it seems possible to argue that no part of mortgage 2 is for the residence and interest on 200k is in principle all allowable, subject to being used for business purposes. There were repair/additions of 10k after purchase of flat2.
Allowable interest is therefore that on 70k on flat 1, plus 65k on flat 2, plus 10k on repairs ie 145/200 of total mortgage
Is this correct ? Thanks in advance for help on this complex affair

[Ian Wright]

You can mortgage right up to the market value of the properties when they were first let and have this as allowable which is £80k plus £65k and £10k repairs. So the way I calculate it you have and extra £10k of allowable mortgage. 155/200 should be allowable.

Ian Wright
WTC Tax Ltd
wtctax@gmail.com

[EwanOrout]

I was recommended to TaxationWeb to ask a very similar question to this - and it didn't take long to find this thread and have my understanding confirmed.

Big help - thanks.

p.s. I hope it is appropriate to post a note of thanks. Apologies if not.

[Ian Wright]

Your welcome. To provide an even better information I am providing a link where HMRC confirm you can do this.

http://www.hmrc.gov.uk/manuals/bimmanual/BIM45700.htm