Could mortgage interest be offset in this case?

[DPT57]

A question on behalf of my brother in law who bought a buy-to-let flat a couple of years ago with cash savings and has been letting it ever since. Recently he needed cash to buy a retirement flat for his father and being without sufficient funds had to raise a residential mortgage on his own house. I am now wondering whether it is legitimate to argue that the mortgage is there to recover some of his original capital from the rental property and that the interest can therefore be claimed against rental income in the usual way? Grateful for your advice colleagues.

[jpkeates]

The purpose of the loan is what determines the tax treatment, and the loan was to purchase a flat for his father.
So, no.

Your brother might be better off borrowing against the rental property and using the funds to pay off or pay down the residential mortgage.
That interest would be allowable (the interest rate for BTL is likely to be higher than the residential mortgage, but it should still work out cheaper).

[DPT57]

Thanks. That was also my assumption. The funds for the purchase of the retirement flat were gifted rather than being provided as a loan so I assume this capital would also be at risk if his father needed nursing care.

[Gordon999]

Before you decide to buy a new flat on a "retirement estate" and finance the purchase with a mortgage , you should study the information on the Leasehold Knowledge Partnership website. LKP recommend NOT to buy because there is more chance of losing your original capital investment.

[DPT57]

Thanks Gordon. He did take advice and I actually called the residents action group on his behalf. In this case the price was less than half the open market value without the age restriction and the general consensus was that in this block prices had already bottomed out and were now going up. Interestingly, there was a waiting list of people wanting to rent these flats at full market rent so although its not the main purpose, with a gross yield of around 10% it wouldnt be a bad btl investment either.