Deduct interest & legal fees (rmge) against taxable income?

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    Deduct interest & legal fees (rmge) against taxable income?

    I have a property that was bought in 1986 . The purchase price paid was £110 K and I took a mortgage of £100 K. This property was used as the family home initially. In circa 1990, I started to convert this property into multiple flats. This property was brought into the rental business in circa 1991.

    In the year 2007- 2008 , I remortgaged this property with a view to release additional funds. The new mortgage amount was £300 K. Out of these £270 K was earmarked to grow my rental portfolio and £30 K was used to pay for a main home for myself.

    Unfortunately, the property deals I was pursuing for growing the rental business did not go through. I held on to the funds intending to make fresh investment . However in the turmoil that followed with property prices falling every day, no fresh investments could be made. The money was lying in the bank and was eventually returned in the year 2008-09.

    I have the following questions.

    1) To what extent is the tax exemption available on the mortgage interest? Is it a) The original purchase price of the property b) Value of the property in 1991 c) Is it the whole of remortgage value of £300 k

    2) In case the tax exemption is not available on the full remortgage amount, can I still claim tax deduction on the interest paid on the excess amount ( £270 K )as the excess funds were borrowed to invest in the rental business even though and though they were not invested due to the unfavourable market conditions. They were not used for any personal or other business purpose. In fact these funds were not used at all.

    3) Arrangement fee – Is tax exemption available on the remortgage expenses? This includes arrangement, valuation fee and legal fees paid to the mortgage company.

    I’d be grateful for advise and if possible reference / links to the applicable HMRC publications.

    .

    #2
    1 none of the above; 270k.

    2 In my view, 270k is probably correct - it was paid wholly and exclusively for the rental business even though not used. NB you will be paying tax on the interest income. http://www.hmrc.gov.uk/manuals/bimmanual/BIM45650.htm

    3 yes (270/300ths) If the mortgage is a 25 year loan, then deduct 1/25th of this 170/300ths in 07/08; deduct the balance in 08/09 if it was repaid permanently, otherwise just 1/25th each year. http://www.hmrc.gov.uk/manuals/bimmanual/BIM45800.htm

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      #3
      Deduct interest & legal fees (rmge) against taxable income?

      Dear Telometer

      Thanks for your response .

      My accountant has given me completly different feedback so has one of the other tax consultants . As per my accountant , the morgage arrangement can be used only to set off capital gains when selling the property . For the interest on the excess loan , he is quite sceptical about setting it off. It does not make sense to me . Will now show him the links and hopefully he will see some light !

      Comment


        #4
        Briefly :

        1. £100K up to 2007-08.

        2. At least up to MV at 1991. Possibly the £270K, as an intended business expense.

        3. Pro rata over the mortgage term - balancing amount in 2008-09.

        Comment


          #5
          Originally posted by King_Maker View Post
          Briefly :

          1. £100K up to 2007-08.
          No. Either max 100k if the money was not used in the rental business; or whatever you like if it is used in the rental business.


          Your accountant is totally wrong if talking about the mortgage arrangement fees. If however he is talking about the survey, then it depends whether it was a cost of acquisition e.g. if you wouldn't have bought it without a survey (in which case capital) or a cost of the mortgage i.e. they wouldn't give you a mortgage without a survey (in which case deductible over life of mortgage).

          Comment


            #6
            Originally posted by Telometer View Post
            No. Either max 100k if the money was not used in the rental business; or whatever you like if it is used in the rental business.

            That is not correct. How can it be more than £100K since that is the amount of the loan?

            Comment


              #7
              We're both wrong. It's perfectly likely that the mortgage will have involved some repayment. Who knows. Max 110 is in fact the correct answer to the question I answered.

              Comment

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