Can you offset rental income with interest on remortgaged (main residence) property?

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    Can you offset rental income with interest on remortgaged (main residence) property?

    Hi,

    im looking at purchasing a property or two after remortgaging on my
    existing house (ie where i live).
    I want to use all of the money I have raised
    from remortgaging to but the property(s).

    As you would with a BTL mortgage can I offset the cost of the interest of
    the re-mortgaged element with the income i'll receive to lower tax
    liabilities?

    It might me worth noting that I am doing a repayment mortgage.

    Any thoughts would be much appreciated.

    Thanks, Lordbluf

    #2
    No, you can't
    The advice I give should not be construed as a definitive answer, and is without prejudice or liability. You are advised to consult a specialist solicitor or other person of equal legal standing.

    Comment


      #3
      Based on a presentation to LLs this week I have to disagree Paul_f. As I understand it if the loan raised by remortg own home is applied to the renting business capital, then interest on that loan is tax deductible provided there is not a mortgage on 1 of the rental properties. I can't remember the precise calculations but Jimmy Carr may have them, as they were allowed by HMRC.

      Comment


        #4
        hmmm... so not a clear consensus? I had read it in a sunday paper months ago that it was possible.

        Comment


          #5
          HMRC do not limit the property on which the loan is secured against. So the answer is Yes you can. You must have a clearly defined and traceable path for the equity raised to purchase the properties and you should declare the purpose of the loan to the provider.. Remember only the interest is deductible form the rental income and the cost of raising the equity is decuctable as well but amortised across the period of the loan. Regards Peter

          Comment


            #6
            Thanks Pete much appreciated. Lord

            Comment


              #7
              Perfectly possible. Paul_f is talking rubbish.

              Comment


                #8
                I have a similar situation to the OP. I remortgaged my house to buy an investment property. That fell through and I kept hold of the money with the intention of buying other property. I found one property quite quickly, and bought it less than a year later. A second property was bought much later, around three and a half years after the remortgage.

                My accountant has said that I can't offset all the interest on the loan against income, only the interest charged on the proportion of the loan used to buy the first property. She has said that the time taken to find the second property has made it difficult to persuade the taxman that the loan was for the sole purpose of buying that particular investment property, even though I was actively searching over that time.

                I thought this was strange - do any of the property tax experts disagree with her or is she right on this.

                Comment


                  #9
                  "She has said that the time taken to find the second property has made it difficult to persuade the taxman that the loan"

                  The alternative argument, of course, is that all the interest is deductible from the moment the remortgage was done. The test for deductibility is that the cost was incurred wholly and exclusively for the purpose of the rental business. Personally I'd be inclined* to claim the whole lot from the beginning - assuming of course that the cash sat in a bank account. Do you have any evidence of the property searching done during this period?

                  ________________________________

                  *but bear in mind that I do not deal with small personal tax clients; I can see where she is coming from.

                  Comment


                    #10
                    Thanks for your reply Telometer,

                    Originally posted by Telometer View Post
                    "She has said that the time taken to find the second property has made it difficult to persuade the taxman that the loan"

                    The alternative argument, of course, is that all the interest is deductible from the moment the remortgage was done.
                    That's what I did, it created a loss (in the first year) as I didn't have any income from property to offset it against, the taxman queried it and the accountant said I couldn't do it.....

                    Originally posted by Telometer View Post
                    The test for deductibility is that the cost was incurred wholly and exclusively for the purpose of the rental business. Personally I'd be inclined* to claim the whole lot from the beginning - assuming of course that the cash sat in a bank account.
                    The loan was taken out wholly and exclusively for the purpose of buying property and, as you said, while I was looking to buy the money was earning interest in a savings account. I think the important word in your post is 'business'. I treated it like a business. Interest from the savings accounts I put the money into was income, just as any rental earning would be income. I figured I could offset any interest charged for the 'business' loan against this.

                    The accountant said I should look at the properties as being an investment and, as such, the rules changed. Savings account interest went into the "Income from Savings" section of my return and, until I bought the first property, I did not have any income in the "property" section of the return to offset the loan interest against (without generating the loss that the taxman had queried).


                    Originally posted by Telometer View Post
                    Do you have any evidence of the property searching done during this period?
                    Yes.

                    ________________________________

                    Originally posted by Telometer View Post
                    *but bear in mind that I do not deal with small personal tax clients; I can see where she is coming from.
                    I think this may be a fundamental difference. I am trying to build up a property business, rather than have a couple of BTL investments. But how do I convince the accountant that my property tax affairs should be considered a business. I have told her but she seems to think that I'll get more hassle from the taxman in my aspect enquiry if I persist with my view of how it should be done.

                    Any comments would be helpful....from Telometer or anyone else.

                    Cheers.

                    Comment


                      #11
                      She wants an easy life. She wants to keep your fees down. You can do both these by agreeing with her and the taxman.

                      "I bought it less than one year later." How much less than a year?

                      It seems to me that either you are not entitled to deduct *any* of the interest, or you are entitled to deduct *all* of it.

                      Did you spend *any* of the money in your savings account on anything other than properties?

                      You need to put together a good case that it is obvious that the money was only ever intended for property investment. Only an idiot would borrow money and put it on deposit for the fun of it!!!

                      Comment


                        #12
                        Originally posted by Telometer View Post
                        You need to put together a good case that it is obvious that the money was only ever intended for property investment.
                        What did you tell the bank when you remortgaged. Do you have any paperwork backing your investment plans?

                        What paperwork do you have showing your constant quest for a house over a three year period? Did you put offers in on other properties? Do you have records of this?

                        Did you spend *any* of the money in your savings account on anything other than properties? (Or perhaps property searching costs.)

                        Was this savings account ringfenced so that you used it only for the property business?


                        Your best case scenario is that the bank interest income received is taxable. There is no hope of offsetting your interest expense against that. However, there must be a view that it is possible to add up all the interest expense and offset it against the rental income when it eventually arises.

                        Comment


                          #13
                          Thanks for your reply, Telometer. Would have replied sooner but been away for the weekend.


                          Originally posted by Telometer View Post
                          She wants an easy life. She wants to keep your fees down. You can do both these by agreeing with her and the taxman.

                          "I bought it less than one year later." How much less than a year?
                          8 months.

                          Originally posted by Telometer View Post
                          It seems to me that either you are not entitled to deduct *any* of the interest, or you are entitled to deduct *all* of it.
                          This was my thinking.

                          Originally posted by Telometer View Post
                          Did you spend *any* of the money in your savings account on anything other than properties?
                          I have taken money out but not more than the interest coming back on the savings accounts - so I'm sure I haven't dipped into the capital.

                          Originally posted by Telometer View Post
                          You need to put together a good case that it is obvious that the money was only ever intended for property investment. Only an idiot would borrow money and put it on deposit for the fun of it!!!
                          I think I can show that the money was never intended for any other reason and that I was actively searching for property over the whole period upto when I purchased the second property - I have surveyors reports costing hundreds of pounds on two other commercial properties that fell through over the last 18 months or so.

                          Cheers,

                          Joe.

                          Comment


                            #14
                            Originally posted by Telometer View Post
                            What did you tell the bank when you remortgaged. Do you have any paperwork backing your investment plans?
                            The reason for remortgaging was to buy a property, partly investment, partly for our own business use. This fell through and I asked the mortgage advisor, rather than the building society, if I could use the money to buy a different property. He said that, as the loan was secured on my home, I could take it down the bookies and place it on a runner in the 3 o'clock at Newmarket. He didn't seem to be think my intention to buy other property was sufficient reason to contact the building society to tell them I was doing something other with the loan - it was just property to him.

                            Originally posted by Telometer View Post
                            What paperwork do you have showing your constant quest for a house over a three year period? Did you put offers in on other properties? Do you have records of this?
                            With the Bank Of England cutting the base rate my loan interest rate followed all the way down - I was earning more on the savings interest than the loan interest so, after buying the first property I may have put the search for another property on the back burner as I have other businesses. As I mentioned in the previous reply, I have survey documents on two other properties over the last 18 months.

                            I had a bit of a clearout during the HMRC aspect inquiry so I may have thrown away some docs showing I was searching - auction catalogues, estate agents details etc.

                            Originally posted by Telometer View Post
                            Did you spend *any* of the money in your savings account on anything other than properties? (Or perhaps property searching costs.)

                            Was this savings account ringfenced so that you used it only for the property business?
                            I can't say, without going through the statements in detail, that I didn't take any money out but I'm sure that it wouldn't amount to more than I was getting back in savings interest. I didn't have a current account specifically for the property "business" so transfers were going through my personal current account but I'm sure that I can account for all of it. If I did cut into the capital, it would have been on the understanding that I would repay it - it was considered a loan - will HMRC see it this way.


                            Originally posted by Telometer View Post
                            Your best case scenario is that the bank interest income received is taxable. There is no hope of offsetting your interest expense against that. However, there must be a view that it is possible to add up all the interest expense and offset it against the rental income when it eventually arises.
                            At the moment, with rates being so low, the tax hit of not being able to offset the loan interest against the income is not massive. As interest rates rise it will become more of a problem - can I refinance the buildings when rates rise so that the loans are specifically raised against the properties and then start to offset the loan interest.

                            Thanks again for your help. I am considering taking independent accountancy advice.

                            Cheers,

                            Paul.

                            Comment


                              #15
                              I suggest you put together a compelling paper, backed up with as much evidence as you can find, along the lines of the above post. Then give it to your current accountant and get her to fight harder. Don't let her write to HMRC without your seeing the letters first.

                              If she won't, then talk to somebody different. I suspect that she hasn't really thought about it. Or hasn't asked the right questions.

                              I feel the two surveyors' reports from abortive projects that you have are very helpful.

                              Comment

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