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Tax relief on interest payments


Lydia

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I have a house that I let out, with a mortgage secured on it from when I bought it. I also have my own home with a mortgage, and I wish to remortgage for a better rate on both loans.

I will get the best rate by combining the two borrowings and remortgaging my own home on an ordinary homeowners mortgage, but what happens to tax relief on interest payments?

The let house has a repayment mortgage which has gone down from £34,000 when I bought it to £23,000 now, while the house is worth £90,000. I am getting tax relief on the interest on the £23,000 at present and wouldn't want to lose that relief for the sake of a reduction on the rate.

Any thoughts?

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Hi Lydia

Remortgaging is fine. You can claim interest relief on a mortgage up to the value of the property when it first entered your letting business. For example, you buy a house in 1985 fo £50,000, and live in it. In 2000 to rent it out for the first time when the value is £125,000, current value £160,000. In this circumstance you can claim mortgage interest on £125000. As you replay the mortgage, the drop in the mortgage will be deemed to be reducing your 'home mortgage amount', before your 'BTL mortgage amount', thus you can claim mortgage interest relief on £125k for as long as your mortgage is above that amount (and the property is let of course!).

I hope this helps!

Kind regards

Sherena

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That is very interesting, I didn't realise that, but I guess it makes sense.

However, what if you have spent money on the property for example:

Purchase Price £180,000

Renovation work £15,000

Purchasing fees £5,000

Total £200,000

I think I should be able to claim on a mortgage of £200,000 not the £180,000, since this is what it has cost me???

If this is the case, what information would I have to keep to prove this?

Thanks,

Mat.

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Hi Matthew

It would be the value at first intro to let business, therefore if in your case the property was worth £200k at first let , then £200k is the key figure, however, it is worth £180k, then £180k is the key figure. However in this circumstance, I would argue that a loan for renovation is for the purpose of the letting business and therefore allow the interest. I would not however consider this in the 'Keeping BTL mortgage topped up' calculation.

Eg. Purchase £180k, Renovation £15K

Example 1 - property worth £200k at first introduction to letting business - therefore £200k is the key figure for mortgage interest

Example 2 - property worth £180k at first introduction to letting business - £180k is key figure for mortgage interest, however, if a loan was taken for £15k renovation I would argue interest allowable on that figure until paid off. But the £180k is the one that becomes your 'top slice mortgage interest' and is the figure to take into account on an ongoing basis

Don't forget that the renovation costs will be allowed, depending on the individual expense - either as a revenue or capital deduction

Hope this helps

Regards

Sherena

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Sherena, thank you so much for your reply.

I am still a bit unsure about this.

When my rental property was first let out (1997) it had increased in value to about £50,000 but the mortgage secured on it has never been greater than the original £34,000. I have a different mortgage secured on my residence of £90,000 (since 1997).

I have been claiming tax relief on a maximum of £34,000 (now reduced to £23,000 as it was a repayment mortgage).

Are you saying that I could have been apportioning part of my residential mortgage payments (up to the £50k) even though the original cost of the let house was only £34,000?

and/or

If I remortgage my own home now for the total £113k I owe, then I can claim £50k worth of tax relief?

If so this could be a huge reduction in my tax bill!

I look forward to finding out in the new year.

Christmas blessings,

Lydia

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  • 2 weeks later...

Hi Lydia

Apologies for the delay - I have been away over Christmas.

In answer to your question you can claim mortgage relief on £50k. Ideally this should be secured on the BTL but you can claim mortgage interest relief on a total of £50k even though some of it is on your rental property. This is because recently the rules changed and as such in theory when your property became a BTL you had input a capital value of £50k into your business. As you pay off your mortgages you can continue to claim relief on the £50k for as long as you have mortages exceeding this, because your BTL property is assumed to be the 'top slice' of your mortgage.

You cannot however go back and amend previous returns - as I say this is a new development and one that many accountants are still not aware of.

I hope this helps - Happy New Year!

Regards

Sherena

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no problem Lydia

And if you need the help of a professional adviser, please do email me on sherena.glanton@horwath.co.uk

Regards

Sherena

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Hi Sherena,

I have been browsing through the website and am awefully new to the business of mortgages and tax deductions. I wonder whether you would be kind enough to offer advice on theoretical matter.

I basically wish to know whether one is any better off declaring a let property on the basis that the tax deduction is worth the sum of the eventual capital gains tax & greater interest rate paid on a buy to let property?

I apologise in advance if my question is a daft one!

Regards,

Peter

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Hi Lydia

Apologies for the delay - I have been away over Christmas.

In answer to your question you can claim mortgage relief on £50k. Ideally this should be secured on the BTL but you can claim mortgage interest relief on a total of £50k even though some of it is on your rental property. This is because recently the rules changed and as such in theory when your property became a BTL you had input a capital value of £50k into your business. As you pay off your mortgages you can continue to claim relief on the £50k for as long as you have mortages exceeding this, because your BTL property is assumed to be the 'top slice' of your mortgage.

You cannot however go back and amend previous returns - as I say this is a new development and one that many accountants are still not aware of.

I hope this helps - Happy New Year!

Regards

Sherena

Hi

Another newbie to the buy to let business. Am i understanding this correctly? You can claim interest payments on a buy to let house even if you havent got amortgage on it as long as you have a mortgage on your main house. My dilemma has been whether to buy a buy to let house 1) with cash, 2) by increasing my existing mortgage on my principal residence or3) by getting a buy to let mortgage. The advantage of the third option was the tax relief as i understood it. now it would appear it would be better to increase my existing mortgage ( at a better rate than a buy to let mortgage). Also i may be starting off letting to my son (on a proper rent) for a few months and as i understand letting to a relative is frowned on by buy to let mortgage brokers.

any other important things i should consider on this topic

thanks for any help

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This seems to have opened quite a debate

To clarify - where possible, you should obtain the best possible connection - ie. a mortgage on the BTL gives the most secure connection for tax relief.

However, if you increase your own mortgage, then ensure you make the connection by indicating on the application that the money is to purchase a BTL, then, you will be able to claim interest on mortgage that relates to the BTL, even though it is secured on your PPR.

In theory, if the cost of the property you are buying is £100k, and you take a further mortgage of £85k on your PPR (stating the intention for the loan as mentioned above) then the interest on the £85k is claimable.

It is also 'possibly arguable' that if you have a mortgage on your PPR in excess of the £85k borrowed then you could claim relief on a further £15k (thus total BTL purchase price) - this is on the basis of ''capital introduced to the letting business'. This has not been tested by HMRC, but is argueable in the opinion of various property specialists.... including me! I stress this opinion is untested.

I hopes this helps

Regards

Sherena

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Sherena

that is a great help to know. i think i will be off to mortgage broker to seek advice about different mortgages available and take it from there.

i am sure i will be back with more questions for the forum at some point if i do go ahead and buy.

great place for advice and help

many thanks

Trudy

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