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Sam
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Hi Sam. I am renovating a property that belongs to my twin

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Hi Sam. I am renovating a property that belongs to my twin sons (after recently purchasing this in their name in January this year - for long term inheritance tax purposes, if I survive 7 years). I have run out of funds at the last stage of renovation, so am looking into getting a <£10k personal loan to finish off the renovations. The intention is to rent it afterwards. I understand that I can offset the interest on the loan against the tax due on the rental income. I have a meeting with our bank on Saturday morning, with my sons and would like to know if the loan needs to be in one or both of my boys' names jointly - for maximum tax relief on rental income purposes please? If I am a joint borrower on the loan, I assume that will scupper the tax relief in the future, at least at 50%? If just one of them gets the personal loan, does that mean only half the tax on the rental income will be tax deductable? The only reason I would add my name to the loan, would be they they would be offered a lower interest rate with my name on it, due to my credit rating being better than theirs, as I am older of course. However, if the interest is going to be tax deductable, then I guess it doesn't matter if the interest % rate is double what I would get with my name on it? Last, but not least, if the loan ends up being short-term, rather than long term and is paid off early, is the interest accrued still tax deductable from future rental income in the same financial year please? FYI, there is no mortgage on the property being renovated. Thank you. Regards Julie
Submitted: 2 years ago.
Category: Tax
Expert:  Sam replied 2 years ago.
Hi Julie
Thanks for your question and for asking for me.
As the purchase has been made in your sons names, and the rental income will be theirs to declare to HMRC, the loan (to qualify for the interest element as an expense) also has to be in both their names.
You could arrange for each of them to borrow half the amount each - which would still allow the full interest each year to offset against the rental income, OR if the loan is just in one name (as this might be more cost effective- but as you point out this is irrelevant is the interest is allowable against the rental income) then only one can claim the relief on their share of the rental income.
And if your name is ***** ***** this will affect a percentage of the interest allowable as an expense against the rental income (as you have no legal interest in the property)so better your name is ***** ***** the loan at all.
Loan interest is allowable for as long as the loan exists - so once its paid off (even early) then interest actually paid in the year, is allowable against the rents, which might be a recalculation for an early settlement of said loan.
And if the settlement figure sees a larger interest payment being made to settle this final payment (lump sum) then this would be the amount due for that tax year.
Let me know if you have any follow up questions.
Thanks
Sam
Customer: replied 2 years ago.

Thank you Sam. That's really helpful. Just to clarify on the Loan Interest and how this is offset against future taxable rental income, can you please clarify that my understanding of this part of your reply is as correct as follows:

So, even if the loan is paid off earlier than the full term, the interest accrued for the duration of the existence of the loan, including any final interest is still able to be offset against rental taxable income, but only if in the same financial year? So, if the loan was paid off say in December, the interest can be offset again taxable rental income up until 5th April 2015, but if it was paid off in or after 6th April 2015, then the previous year's interest accrued might not be able to be offset? Or doesn't it matter which FY it falls in? Also, I don't quite understand your last sentence. "then this would be the amount due for that tax year"? Can you reword or clarify for me please? Thank you very much. Regards Julie

Expert:  Sam replied 2 years ago.
Hi Julie
Thanks for your response
Usually with a loan - the capital amount is agreed and the loan interest calculated for whole term (based on the amount borrowed, the amount of years agreed at the outset, and the interest rate applied) which creates a monthly figure which remains the same throughout the whole loan period.
If the loan were to remain paid each month for whole duration of the loan, then the interest element that could be claimed as an expense would be the months interest paid along with the loan repayment, between each 6th April to the following 5 April.
(And of course the year the loan starts and last year of the loan, in this case would see a period of less than 12 payments)
If the loan was paid off early, then for the periods that the agreed loan repayments were made, the interest element would be claimed against the rental income, but an early repayment would see a full recalculation of the amount of loan remaining, and the interest due.
For that tax year, the loan repayments already made, would see an allowable claim for the interest element of each loan repayment, and would see a possible recalculation of loan interest - merely on the balance of loan remaining to add to the final settlement figure.
And this additional interest could be claimed according to actually what was paid (this is what I meant when I stated that this is the amount that would be due for that tax year)
But once the loan had cased (and therefore the interest element of the loan would also have ceased) then there would be no further allowable claim, as no further out of pocket expenses would arise.
So to recap, lets say £10,000 borrowed over 5 years at the loan interest figure was 10%
This would create an amount owed of
Capital borrowed £10,000
Loan interest £3000 (approx. calculation)
Total mount owed £13000
This would create a loan repayment of £312 per month of which £72 would be the interest element
So if the loan ran its full term - £72 a month loan interest would be available to claim as an expense against the rental income.
If 2.5 years in the loan was repaid in full
There would be £5000 of the original amount borrowed
To date 2.5 years x £72 interest would be claimed against the rental income
And although £1500 of interest would be outstanding (half of the original calculation at the time the loan was secured) the fact that an early settlement figure was requested, the remaining loan would be recalculated for the interest due. You (your sons) would make the final settlement payment to close the loan arrangement, and any interest suffered on the final settlement calculation could be claimed against the rental income (along with any of the £72 paid on normal payments for that specific tax year)
Hope that is a little clearer.
The upshot is, whatever interest is actually paid that's the amount that can be claimed against the rental income.
Thanks
Sam
Customer: replied 2 years ago.

Thank you for your detailed reply Sam. This is really useful before our meeting with the bank on Saturday am.

Last quickie. My boys have never filled out a self assessment tax return before. Is this something that is simple to do online via the HMRC website for rental income and claims against rental income, or too complicated to put on a form by a non-qualified tax expert? Would you recommend paying a few hundred quid each for their tax returns to include rental income and their other employment earnings, or is it reasonable to think, that with my help, this could be done themselves online? Thank you

Expert:  Sam replied 2 years ago.
Hi Julie
Thanks for your response and further questions
The online self assessment is very manageable - as once registered for self assessment, then the online registration can be undertaken.
When it comes to filing the tax return, it asks questions, to establish what incomes there have been through the year, and collates this all together to produce a tax calculation of what liability there might be - so its very straight forward and not at all necessary to engage an accountant to undertake this.
But some people do opt to pass this task to a professional and just note that if this is the case, then the accountancy fees are an allowable expense against the rental income.
But I have no doubt this is something with your help they could do, and you can always come back to Just Answer, if you need clarification on any aspect of the this task, and if you would like, ask for me Sam - and the other experts will know to leave the post for me to answer.
Let me know if you have any other questions, and if you could take the time to rate the level of service you feel I have provided, it would be appreciated. as this ensures I am credited for my time
Thanks
Sam
Sam, Accountant
Category: Tax
Satisfied Customers: 13809
Experience: 26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
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Customer: replied 2 years ago.

Thanks very much Sam. I feel fully informed now and have marked "Excellent" in the feedback.

Regards

Julie

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