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Sam
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Category: Tax
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I have a property tax query. I lived in a flat for a few

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Hello, I have a property tax query. I lived in a flat for a few years then rented it out, then in order to minimise tax I re-mortgaged it with a buy to let mortgage so I could offset the interest payments against tax (and I used the capital I freed up to buy the house I now live in).
After submitting a tax return with reduced tax due (due to mortgage interest), HMRC are saying it's not valid as you can't use a buy to let to free up capital on a property you already own outright. This is surprising and if I'd known this before I'd have just bought a different flat to rent out rather than use the one I already owned. Are HMRC correct in this and if so is there anything I can do to dispute it? Thanks.
Submitted: 4 months ago.
Category: Tax
Expert:  Sam replied 4 months ago.

Hi

Thanks for your question - I am Sam and I am one of the Uk tax experts here on just Answer.

What was the original value when you started to rent out this flat and mortgage outstanding at this time and how much did you remortgage by -

Also did you mean you offset the interest payments against rental income rather then offset against tax?

Thanks

Sam

Customer: replied 4 months ago.
the value of the flat was about 350K when I started renting and is still worth about that. Before I rented it I'd just about paid the mortgage off (around 10K left) and remortgaged to about £200K after I started renting (changing to a buy to let mortgage) the interest on that is about £800 a month and the rental income is about £1000 a month so I paid tax at 40% on the £200 difference.If what HMRC are saying is true, I would never have re-mortgaged that flat, I would have simply sold it and bought another to rent out. thanks.
Expert:  Sam replied 4 months ago.

Hi

Thanks for your response

Under Property Income legislation see that at the time the property was introduced to renting its value according to you (and I assume you have valuations to back this up) was £350K

So you could have (after renting commenced) mortgage up to the equivalent of this value - but only borrowed £200K

The legisaltion you need to appeal this is BIM45665 - which states (see below)

BIM45665 (‘Interest: must be paid wholly and exclusively for business purposes’) states:

‘Interest is allowable as a deduction in computing business profits or losses if it is incurred wholly and exclusively for the purposes of the business. This will be the case where the borrowed money is used to finance the acquisition of business assets, such as plant and machinery or property, or to provide working capital for the business, paying business costs. The interest is then incurred wholly and exclusively for the purposes of the business.

‘A crucial point is the use made of the funds during the period when the interest accrues. This is explained further in the following paragraphs. The use of the funds may change – it is not fixed forever by the initial purpose for which the loan was obtained.’

You can deduct the interest on a loan up to a maximum of the market value of the property when you started letting it.

The next consideration is what the loan(capital borrowed) is used for and that is of NO consequence at all - as you are using the rental property and as the loan is secured against it - there interest becomes allowable.

You used it for purcahse your current residence which is actually one of the allowable examples HMRC provide in the Business Income manual - you have full grounds of appeal on this basis see example 2

Link here for this https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim45700

Let me know if I can assist further - but if you have all that you need, then it would be appreciated if you could rate me for the level of service I have provided (or click accept) the fact you took out a buy to let mortgage alters nothing as example 2 also highlights!

Thanks

Sam

Customer: replied 4 months ago.
ok thanks Sam. So just to clarify, the fact that I'd previously lived in the flat and paid off most of the mortgage shouldn't have a bearing on whether I can offset the interest payments against the rental income? If not then it sounds like perhaps the chap from HMRC who called me had got this wrong I suppose (he was from the unit doing the landlord amnesty scheme - you may recall you previously advised me on that for which I'm grateful for). thanks, David
Expert:  Sam replied 4 months ago.

Hi David

No that would have no bearing at all - as example 2 also shows - that had been the main residence , then the property was let out , remortgaged as buy to let for which the capital released financed the new property purchased which became the main residence. And as the capital YOU borrowed was LESS than the value of the property at the time rental began - all the interest (which is the whole payment as buy to let is interest only) is allowable to offset against the rental income

Just for info - I am ex HMRC and advised regularly on all tax matters (so UK property and capital raised was a very popular one) have provided education to individuals and other accountants and now run my own accountancy business (and I am glad you were please with the previous help I provided) but its shocking that someone who is handling the landlord amnesty scheme does not know HMRC legislation - but you can help to teach him with your appeal against that decision! All with links to the appropriate legislation that you can quote

Let me know if I can assist further - but as usual a rating would be much appreciated (or click accept)

Thanks

Sam

Sam, Accountant
Category: Tax
Satisfied Customers: 13704
Experience: 26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
Sam and other Tax Specialists are ready to help you
Customer: replied 4 months ago.
that's great advice Sam and much appreciated. The HMRC chap didn't sound too sure of his facts so hopefully it's just a misunderstanding. Still, your reply has reassured me I wasn't going crazy! Thanks again for the advice, much appreciated. David

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