INTEREST RELIEF AGAINST PROPERTY INCOME Chris Jones BA CTA (Fellow) ATT Tolley Tax Training

INTEREST Interest is deductible if “wholly and exclusively” for the business of letting Will not be allowed where funds are; – to buy non rental investments – to buy private assets – for the provision of private funds …but Revenue’s manuals state that interest on re-mortgaging is allowable in certain cases

EXAMPLE 1 Ms D increases her business overdraft by £10,000 …and increases her drawings by £1,000 per month Her capital account does not become overdrawn Interest on the overdraft deductible

EXAMPLE 2 Mr A currently lives in a flat worth £375k – current mortgage £80k Mr A is moving but wishes to let out his current property He converts the existing mortgage to buy to let and borrows a further £125k on the same..the £125k is used as a deposit for his new home ….but the whole of the £205k buy to let interest is deductible!

EXAMPLE 3 Mr B originally bought a property for £200k with a £150k buy-to-let mortgage Mr Bs capital account stands at £50k property has now increased to £300k Mr B re-mortgages & debt increased to £200k Mr B withdraws the additional £50k and pays off his personal mortgage The additional £50k borrowing in the “buy-to-let” business is deductible!

EXAMPLE 4 What if additional borrowings are to purchase more buy-to-lets? Interest will always be deductible …even if the loans exceed the original acquisition cost of the existing properties No reference to capital account as funds are not being withdrawn …they are reinvested in buying more property

OWN MORTGAGE What if the deposit for a buy-to-let comes from increasing your own mortgage What the mortgage is secured on is irrelevant …it is the purpose of the loan that determines deductibility Interest on home loan used for a deposit will therefore be deductible Track the funds Capital repayments deemed to repay private borrowings first!

EXAMPLE 5 Miss D bought a property for £300k with a £195k buy- to-let mortgage Deposit of £105k was provided via her Virgin One account Interest for 2004/05 was £5,250 on the £105k Schedule A profit was £7,000 before adjusting for this interest Entry put through – Dr interest £5,250 – Cr current account £5,250 Full relief given

JOINT ACCOUNTS Own house and own mortgage is in joint names Buy to let property is solely in wife’s name Buy to let deposit was funded via the home mortgage Will interest on the deposit be allowable? If the Schedule A business bears the cost of the interest it will be deductible Pay an amount from the Schedule A bank account to the joint account to cover the interest

CAPITAL REPAYMENTS Buy to let deposit was funded via the home mortgage Monthly payments are made on the home mortgage What capital are you deemed to be repaying? Assume the deposit element of the home mortgage is last to be repaid

EXAMPLE 6 Mr E has a Virgin One mortgage on his home of £40k He then draws down a further £60k to fund a deposit on a buy to let Virgin One balance fluctuates between £90k and £105k every month Interest on the £60k is fully deductible He then pays £50k into his Virgin One account when the balance was £85k Permanent restriction in relief (25/60) – Balance has gone down to £35k – Are increases in loan for Schedule A?

RECORDS Keep a separate bank account Prepare a profit and loss account and balance sheet Show proprietors capital account as two – capital account – current account When the property value rises more funds can be borrowed from the lender ….and used to repay the capital account