Income tax relief is available on a loan taken out to release capital in a rented property that is subsequently used to purchase another property or even to reduce the capital outstanding on the main residence. The actual reason for the mortgage is irrelevant.
The key criterion is that the total amount of capital released must not exceed the market value of the property when originally brought into the letting business. If the property had originally been bought with the intention to let, then this amount would be the purchase price; otherwise the market value at the date of transfer is used.
As from 6 April 2017 interest relief at higher rates of tax is being phased out over a four-year period such that by the tax year 2020/21 only basic rate relief will be claimable as a tax reduction.
Anne wishes to raise £150,000 via a mortgage on two Buy To Let properties that were purchased with cash some years ago. The purchase price of the properties was £125,000 and they were let out immediately on acquisition. The mortgage monies will be used as capital to purchase a holiday cottage for personal use.
The maximum amount of interest deductible will be the proportion relating to the amount paid for the properties originally, i.e. £125,000.
There is no need to include the cottage in the portfolio for tax relief to be allowed. It can be kept for private use but interest on £25,000 (the balance of the £150,000 mortgage) will be disallowed.
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