Borrowing against residential to fund commercial - interest fully tax deductible?

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    Borrowing against residential to fund commercial - interest fully tax deductible?

    I am sure this has been discussed before somewhere but I have done a bit of searching without finding anything. Apologies if I am covering old ground here.

    My understanding is that if a mortgage is taken out on a residential property to fund the purchase of a commercial property, interest will be fully tax deductible from the commercial property income. What matters is the purpose, not the security. Is this correct?
    There is a fine line between irony and stupidity. If I say something absurd please assume that I am being facetious.

    #2
    I have found some references which I think confirm that my understanding of this is correct.

    BIM45700

    References in the text to a ‘business’ should therefore be taken to include both trades and property businesses...

    S34 Income Tax (Trading and Other Income) Act 2005

    A proprietor of a business may withdraw the profits of the business and the capital they have introduced to the business, even though substitute funding then has to be provided by interest bearing loans. The interest payable on the loans is an allowable deduction. This is on the basis that the purpose of the additional borrowing is to provide working capital for the business.
    https://www.gov.uk/hmrc-internal-man...anual/bim45700


    BIM45685

    The security for borrowed funds does not determine the use of those funds. It is very common in small businesses for loans to be secured on the proprietor’s home, because that is the only substantial owned asset. This is not relevant to the consideration of the use of the funds borrowed.
    https://www.gov.uk/hmrc-internal-man...anual/bim45685
    There is a fine line between irony and stupidity. If I say something absurd please assume that I am being facetious.

    Comment


      #3
      I would imagine there must be some written agreement that the company pays the annual interest on the mortgage on your home.

      Otherwise you may be treat as the lender and interest paid to you is taxable as your income.

      Comment


        #4
        In my case the security property in question is not my own home. It would probably be more than one, in fact. BTL portfolio mortgage.

        Not 100% sure what you mean by 'company' here. I would presume Ltd. I have not got a company and wouldn't particularly intend to use one here. My understanding is that the main reason for landlords to operate as a Ltd. is because of recent tax policy changes - particularly mortgage interest on residential BTL no longer being fully tax deductible. But that doesn't apply to commercial or mixed property.
        There is a fine line between irony and stupidity. If I say something absurd please assume that I am being facetious.

        Comment


          #5
          Sorry, I misread your situation. Try posting your question on a tax forum ( taxcafe ?)

          Comment


            #6
            Thanks. May do.

            Unless anyone comes along with conflicting information, though, I am happy enough that what I thought is correct. That interest is taxed based on the purpose of borrowing is what I have always understood, and those BIMs seem fairly clear on the subject.
            There is a fine line between irony and stupidity. If I say something absurd please assume that I am being facetious.

            Comment

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