Tax Query: Offsetting interest costs

[Matthew]

Happy new year everybody,

Sherena has opened a can of worms in my head with this topic, which I am now thinking I could benefit from by planning properly on my next property.

My scenario:

Property purchase price August 2006 = £178,000

Purchase fees = £4,500

Refurb costs = £2,000

Total Outlay = £184,500

Rented out on 1st October 2006 after refurb.

Revalued in December 2006 @ £210,000.

What is the mortgage amount for which I can offset the interest costs, I would argue £210,000, is this correct?

Also, what is the rules on the value of the property as introduced to the BTL as I have bought the property solely for the BTL purpose.

Also what is the agreeable method of valuation as one would benefit greatly from an over-exagerrated Estate Agent valuation for tax purposes. Does it have to be a surveyor or can it be valued by an estate agent?

Can I offset my own mortgage against this, if say my current mortgage on the property above is only £168,000.

Thanks in advance,

Regards,

Mat.

[plym77]

Hi Matt

I appreciate that this is a topic of interest (pardon the punn) to people as many don't reaslise that the rules have changed. I should point out that as yet HMRC have not argued a case and so the method remains 'untested', but it is a recognised format with tax advisers 'in the know' - it is an interpretation using this as key:

In the income property manual there is a phrase:

The guidance on interest as a Case I expense at BIM45650 onwards applies equally to interest under new Schedule A.

You can then find the way a capital account works at the following link:

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

The key example in the business income manual (link above) is example 2.

The key is the value at first let - this is meant for people who buy a property for say a PPR and then later they introduce it to the letting business. In your case I think that the fact that there are only a few months between purchsing the property and letting it that the arguement is that your property was purchased for the pupose of letting and as such is introduced to your letting business at purchase.

The simplistic answer is that your property value is £178k at introduction to the letting business and as such it is on that figure that you can claim interest relief. The fact that you had costs is irrelevant as the value of the propert is £178k. I note you have secured only £168k (which is common practice for a letting property due to the way BTL mortgages work), therefore I would argue that the capital introduced to the letting business if £178k and therefore if you have £168k on one property you can claim interest on the other £10k on the other property on the arguement that if the BTL mortgage permitted it, you would take the 100% and have therefore used £10k of your own money to finance the additional £10k. As this additional £10k has had to be borrowed by way of a mortgage on your PPR, interest on that £1ok would also be allowable.

I hope this helps - and of course, my advice, as always (!) is general only and in no way constitutes specific tax advice...

Regards

Sherena

As an after thought... in theory, if you have taken a loan to pay for the refurb, then this is possibly a letting business loan and therefore, it may be arguable to be able to claim interest on a loan taken for this purpose - but I think in this case a link would have to be made, for example, stated in the 'loan application' or 'additional mortgage application' that it if for the purpose of refurbishment of the letting property, although I should add that this is tenous and again, untested.

Gosh... you have me working hard today! haha

Regards

Sherena