Could I still claim tax deduction on the loan finance

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    Could I still claim tax deduction on the loan finance

    I have a portfolio of 6 rental properties and the last 3 of them were purchased with re-mortgages of previously unencumbered properties, with each re-mortgage specifically applied to an individual new property. For my tax return the figures are of course all pooled, (total income minus total borrowing etc).

    I am now thinking of selling one of these last 3 rental properties but keeping the loan that we applied to it when we bought it, (the loan is secured on a completely different property). I assume that I can continue to deduct ALL the borrowing from the now reduced total income for tax purposes?

    Thanks
    David

    #2
    Provided that the loans are against properties that are all part of the letting portfolio, they are financed for the business and are allowable.
    What you did with the money released for is academic.
    When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
    Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

    Comment


      #3
      Hmm. I think there could be a problem then because the property we have the loan against would then be sold. It seems a bit ad hoc though in that we know which propties we bought with each respective loan but its not recorded in any official form since the funds were raised against other properties.

      Comment


        #4
        If the property with a loan is sold, presumably the loan will be ended by the sale, anyway?

        Can you refinance to get the mortgages and properties set up to be the most tax efficient going forward?

        Assuming it pays back more than it costs.
        When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
        Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

        Comment


          #5
          No, as I said, the loans used to buy my last 3 properties were re-mortgages of earlier unencumbered property purchases. Because the funds were used to purchase buy to let properties I have claimed tax relief on the interest payments against the rental income from these newer BTLs. Only I know which loan is applied to which property though, although there is of course a paper trail which shows the funds coming in and then shortly afterwards out again for the purchase. So I would be selling one of the newer BTLs which won't in itself crystallise the debt, but I now do think that I would have to remove the mortgage relief element for it from my tax claim

          Comment


            #6
            I may be being dim here.

            Your letting business is one business, not a series of individual property based businesses (unless they're a series of separate limited companies).
            So are the three previouslt unencumbered property purchases against which you have subsequently taken out loand all properties you rent as part of your letting business?

            If they are, selling the property you bought with the cash you borrowed on a different let property doesn't change anything, any more than if you'd spent the cash on a holiday or a car.
            The interest is allowed against the property funded, not the one you bought with the money raised by the loan.
            And the funded property rremains in the business.

            And if they're not, you can't claim the interest as an allowance on them anyway.
            When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
            Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

            Comment


              #7
              Ok, that was not my understanding. I understood tbat it didnt really matter to HMRC where the funds for the purchase arose but only where they were applied. At this point i think i had better check my assumptions with HMRC.
              Thanks

              Comment


                #8
                Check with an accountant first.
                I am confident that I'm right, and you don't want the first person you tell to be HMRC.
                When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                Comment


                  #9
                  I've just had a conversation with someone at a well know firm of property income tax advisors and they had the same take on it as me, that if I raise finance on property A and use it to buy property B then its property B that has the qualifying relief and while I could sell property A with no effect, if I sell property B but don't repay the mortgage, I can no longer claim the tax relief on it. I was a bit confused about this initially but I think I will go with that advice and change my plans.

                  Comment


                    #10
                    I'd be happy to be shown to be wrong.

                    Fundamentally the expense has to be wholly and exclusively for the business.
                    If you have a mortgage on property A and use the borrowed funds to buy property B which is let out, you'd still have to pass that test.

                    If property A isn't part of the business (let's say you or another family member lives in it) the expense fails the "wholly and exclusively" test.

                    If both property A and B were within the business, the funding would pass the test.
                    If property A was a commercial property, but still let for rent, it would pass the test.

                    Otherwise, everyone could (and would) mortgage their own home, buy a property, let it out and claim the interest on their residential mortgage as a business expense.
                    When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                    Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                    Comment


                      #11
                      In terms of business accounting, loans aren't 'applied' to any property. When you get a loan you raise cash. You then use that cash to finance the business.

                      As you are not trading as a company, if you sell property B but don't repay the mortgage, I think that what will matter to HMRC is: What do you then do with the proceeds of the sale?
                      If you use them to buy another BTL property then, IMHO you can continue claiming the interests. But if you extract them from the business then you cannot.

                      Comment


                        #12
                        Hi DPT57,

                        As of April 2017 you will be unable to claim back any loans as an allowable expense on any properties that are being rented out. The legal changes that are coming into affect are under section 24. It is worth you fully understanding the clauses as it is leaving every landlord which has mortgages on their portfolio in the minus numbers. You will be taxed on the full amount of income from every property. This takes full effect by 2021/22.

                        There is some useful property tax seminars in london and some good companies on the net if you look for commercial incentive trusts on google and anyone you find there would be able to advise fully in what you can do to save tax and prevent this new law changing your lifestyle. I would also take into account the capital gains taxations if you decide to sell. What is the reason for selling the other 3?

                        Comment


                          #13
                          Originally posted by jjlandlord View Post
                          In terms of business accounting, loans aren't 'applied' to any property. When you get a loan you raise cash. You then use that cash to finance the business.

                          As you are not trading as a company, if you sell property B but don't repay the mortgage, I think that what will matter to HMRC is: What do you then do with the proceeds of the sale?
                          If you use them to buy another BTL property then, IMHO you can continue claiming the interests. But if you extract them from the business then you cannot.
                          Ok, thanks for the comments about it being 'applied', that does help my understanding. Overall though, your comments do seem to support my view of events.

                          Thanks September19, I am aware of the section 24 tax changes. Actually 20% mortgage interest relief will still effectively be available to landlords even after 2020.

                          Comment


                            #14
                            Originally posted by jpkeates View Post
                            Otherwise, everyone could (and would) mortgage their own home, buy a property, let it out and claim the interest on their residential mortgage as a business expense.
                            I may also be missing something here, but I don't see where the problem is with this. If the funds are being used for a buy-to-let property then surely it doesn't matter where they came from. If loan interest is being paid on funds that have been used for a business then why wouldn't they be a legitimate business expense?

                            Comment


                              #15
                              Originally posted by jpkeates View Post
                              Otherwise, everyone could (and would) mortgage their own home, buy a property, let it out and claim the interest on their residential mortgage as a business expense.
                              This is exactly what we do.

                              Comment

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