Borrowing against our own house....?

[Mrs Stato]

Hello, I wonder if you can help me answer this tax question that has been bugging me for a while now...

My husband and I have an bank overdraft-style mortgage on our house where we live, and are currently in credit (i.e. we have effectively paid off our mortgage).

We would like to purchase a BTL property.

Can we take equity out of our house to pay for the BTL, and claim the interest incurred on the loan as an expense when doing our tax return?
If so, does it matter that we are currently in credit on our residence? Also, do I need to have any supporting documentation to satisfy the tax man?

I've found a thread from 2009 which makes me think that we may be OK to borrow against our house, but lots can change in 2 years.....

Many thanks!

[TaxationPete]

If the purpose of the loan is declared and the transfer of equity is fully traceable and wholly and exclusive for the purchase of the B2L then I do not see a problem. Regards Peter

[Mrs Stato]

Many thanks Peter, it is much appreciated.

[Tanush]

I was just reading your tread and it actually never accrued me, that you can do it this way , we bought 2 BTL properties and re- mortgaged our own house for that ,all money 100 % for the deposits of BTL properties came from re mortgaging the house . So does it mean that we can reclaim interest on this extra borrowing against rental income for our BTL properties? Peter you are saying that the purpose of the loan should be exclusively for buying BTL, some of the money we spent for renovating and some living expenses during the renovating , but if I just take the amount of deposits we paid for BTL houses and calculate the interest at the correct rate , will it be correct to declare it against rental income?

[Telometer]

Don't understand. You bought BTL houses and spend some of the money on "living expenses during the renovation"?? How so.

[Tanush]

What I was trying to say ,that not 100% of borrowing were spend on buying BTL but I am not aiming to claim interest on all the borrowing , only on what was used for deposits for buying BTL . I guess that the interest on the amount which was spent on renovating the properties can not be claimed against rental income either as it is more improvement work , and interest on those part of money can be claimed later if deciding to sell the property. During the renovation we did not had any other income so we had to use some for personal use.

[Telometer]

All interest relating to debt where the cash was spent on the property business is deductible.

[Tanush]

So you are saying that if I spent 10 K from the borrowing on renovating the properties I also can deduct the interest of that 10k from the RENTAL INCOME now, and then actual spending later when selling if so. Is that correct?

[Telometer]

Yes. Exactly the same as for the purpose of the property.

And any electricity etc. bills during the period before it is let out can be deducted against rental income, and any interest arising on them similarly against rental income.

[Tanush]

Great thank you, other question arising , do I start counting the interest from the moment the property bought or from the moment the borrowing made?

[Telometer]

Any expense incurred wholly and exclusively for the purposes of the business is eligible for relief.

[philc27]

Hi all,I'd like to ask a similar question, just for clarity.

I have a BTL with a mortage that recently reverted to a high SVR. I would remortgage but it would be 100%, no equity left in the property.

So, I'm planning to secure a mortgage with a good rate on my house, and use it to redeem the BTL mortgage. From what's been written so far, it seems that I can 'assign' this debt to the BTL property, and offset the repayments against the income from the flat, thus minimising any tax on the income.

Does everyone agree/disagree? All thoughts welcomed - thank you.

Final question: do I need to declare/document this?

[Phlash]

I would deduct the future interest from what you are proposing.
My take:
The purpose of remortgaging your home is to refinance your BTL. If your audit trail from your funds received in the remortgage are clear to the funds used to pay off the BTL, then the interest on the amount used to pay off the BTL and associated costs will be allowable, if this total amount is less than the capital value* of your BTL (assuming you have just one, if you had many, then you'd look at the capital value of the whole portfolio).

So, I see four types of cost deductions to consider:
1) Arrangement fees of the new mortgage - amortise over life of mortgage in a straight line.
2) Future interest on new mortgage (subject to above limits) - deduct in tax year that expense occurs
3) Exit costs of the BTL loan - deduct in the year the refinance occurs
4) The balance of unamortised costs associated with the BTL loan - deduct in the year the refinance occurs.

Hope that helps.

*capital value when first introduced to the lettings business