Tax Relief or No Tax Relief, that is the question.

My current home is mortgage free and I am considering buying a new home on a new mortgage taken out on that home, then renting out my current home.

My question is; will I be allowed any mortgage relief on the new mortgage even though its not on the rental property?

I am quite confused already as a Sister of one of my best friends is a “Tax Expert” in an accountancy firm and does rent out a property or two herself.

This was her response –

You should be able to claim mortgage interest relief on a loan up to the market value of the let property on the date you put it into your property letting business. This is because business relief rules allow tax relief on a loan to withdraw your capital from a business.

For example if your current property has a market value of £300,000 you can claim tax relief on a loan up to this amount.

The link below to HMRCs manual , example 2 , explains this.

The manual does not state that the security of the loan has to be the let property and therefore it should be possible to borrow the money against your new home (ie: not at buy to let rates) and get tax relief on the loan interest against your rental income.

You are able to use some very beneficial tax reliefs if you sell your current property after it has been let but that’s another subject.

http://www.hmrc.gov.uk/manuals/bimmanual/BIM45700.htm

However I was not convinced and really need to be more certain of my Tax liabilities before I can commit to buy my new home. So I asked her if she was sure as Example 2 was quite different to my situation.

This was her response.

Yes its not easy but as far as I know it doesn’t matter what the funds are secured on. What you are doing here is not claiming relief on a mortgage to buy a property you are letting, but are borrowing money so that you can withdraw your loan to the letting business. Your loan to the letting business is the market value of the property on the date you put it into the business. (market value on the date first let).

I realise this is not easy to understand but I believe it works ( ie: is within the law of tax).

The first para of the guidance below, I believe gives the OK for a claim.

Tax as ever is grey not black and white , and because we work under the rules of self assessment you have to take the decision as to what to claim up front.

You could try one of the big firms of accountants and see what they think , if you get them to do your return with the claim as above and it fails you would be covered by their insurance.

I assume you have explored getting a loan on your current home now to fund the new purchase, you would have to tell the lender due course when you are let your current home and they would then charge you a higher buy to let rate but the tax relief would be worth more. You would then be completely in line with HMRCs example 2.

That said, I would go for my original advice.

Yours

http://www.hmrc.gov.uk/manuals/saimmanual/saim10030.htm

I am still not convinced and I got lost in some of the above to be honest.

So, what do you all think?

Yes or No to Tax Relief on the new mortgage secured on the new home?

Thanks a lot in advance.

Paul

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