Tax deductible interest

[IAN DUNCAN]

Please could anyone advise on the following:-

If a new property is bought wholly with funds from an equity release loan on a main residence, are the interest payments on that loan allowable against rents received on the new property? If so, do the details have to be registered with the inland revenue in advance or will they take your word for it? Thanx in anticipation.

[Preston]

Hi

If you have complex arrangements you will need specialist advice, but the basic principle is that what is important is the purpose for which you obtained the loan and not the property on which it is secured. So, it is quite legal to borrow money against your own home and claim interest relief against a buy to let, provided the loan was obtained for the purposes of acquiring or improving the latter.

Hope that helps.

Preston

[plym77]

Once again, Preston is right (well schooled in the taxation of property Preston! ) but a couple of added bits

There are two main ways to consider loan planning

a) where it is secured

what it is for

In basic terms, If you buy a rental property for £100k and take out a loan on your main residence for £100k to finance it, then the interest on that loan is allowable against your property. The key connection in this example is the REASON for the loan.

However there is also another option (mostly for those owning rental properties for a long time). You are able to draw capital on the rental property up to the value of the property 'at first let' FOR ANY REASON and claim the interest deduction. The key connection in this example is where the loan is SECURED.

This can be of particular use to clients who have previously lived in a property which they may have bought many years ago for very little (say £50k), but more recently, when values were higher, put the property on the rental market when the property was worth say £150k. I have helped them restructure previous borrowing, extract cash for other reasons (whether a car, to invest etc etc) etc and his borrowing became tax deductible against his rental business.

Those are the ver basics, and in relality this is not a straightforward area. I have to point out that you need to do this sort of planning properly, making sure the appropriate steps are taken and documents dealt with. If anyone is considering looking at loan structuring then they should do this through a tax adviser (and of course I am happy to offer my services! ) to ensure that it will not fall down under scrutiny by HMRC.

In the meantime I hope this helps

Sherena