Capital Gains and 2nd house purchase pointers . . . . ?

No - only if it has been your main residence (at any time).

No, the extra interest cannot be offset against tax, as the purpose is to purchase your main home, which is no longer a tax deductible purpose.

Up to you. I would recommend a repayment mortgage, if the budget permits.

No. If you sell a house which has always been your main home since you bought it, there is no CGT in any case, no matter how long you've owned it. There is also no CGT if, it having been your main home, it wasn't your main home during the last up to 36 months prior to sale. But if it has never been your main home, there is always potential CGT liability.

In that case chances are that if you let it for 6 years before selling up, there still won't be any CGT payable. In detail it will of course depend on how long you've owned it, what the gain is, etc, but the effect of Lettings Relief can be the doubling of the "36 months extra free" deal.

You can't do that. Only interest on an existing loan qualifies for tax relief. It's OK to transfer an existing loan to a new lender, or change its status from repayment to interest-only, and even to increase the borrowing, but only the original loan qualifies for interest tax relief.

For example, if you originally bought house 1 with a £50k loan on a repayment mortgage, and meanwhile you've paid down £5k so the outstanding balance is £45k, then if you borrow an extra £15k for a deposit on house 2, bringing the total loan 1 size to £60k, then only 3/4 of the interest on that loan will be deductible from rental income.

You'll be aware that the BTL loan will involve a higher interest rate than you'll pay for the mortgage on the new house. So it makes more sense, if that option is open to you, to have as much as possible of the house 2 borrowing on the house 2 loan, because it's cheaper, as you can't get tax relief. If the BTL interest rate is 5.7% and the private one only 4.2%, you're throwing 1.5% out the window.

Even the qualifying part of the loan may be too expensive and, if circumstances permit, you may be better off having as much as possible of the loan at the cheaper rate.

For example, each qualifying £100 of the BTL loan will mean you don't pay tax on £5.70 of rental income per year. If you were to have those £100 in the cheaper loan instead, then the £5.70 will now be taxed. If you are a standard rate taxpayer and she is not working, and the venture is 50-50, your effective combined tax rate is only 11%, so you get to keep £5.07 of the rent which used to finance the £100 BTL borrowing. You still have to pay £4.20 to fund the cheaper £100 borrowing, but you're still 87p better off.

You'll need to do your sums. If you're both higher rate taxpayers, then of course the cheap loan rate would need to be 3.42% to compete with a 5.7% BTL loan. If you can re-jig the beneficial interest to the non-taxpayer (which you can if you're married), then the cheap rate only needs to beat the full BTL rate at par to make it worth while.

No. Bad idea. In principle it's good thinking to contribute more in "fat" times than in "lean" times, but with interest rates as low as they are just now, times won't get much fatter. If even now you find you need to go for interest-only, then you're already overcommitting.

If you meant you wanted to go IO and also, from the outset, set up regular overpayments, you may find not all lenders like that sort of thing, in which case you might as well go for repayment, but at a level to suit your budget. Go for as short a term as you can afford, you can always increase/decrease it later (to bring payments down/up) or even change to IO (and back again later).

You're meant to read them, not eat them. :-)

"Ronald Raygun" wrote

Doug, RR - Why do both of you still not trust the IR manuals??

Extract of post from 16th November last year :-

See Example 2 at

When a previous PPR is introduced into a property business, and re-mortgaged at anything upto the latest market value (at the time introduced to business), *all* of the mortgage interest is allowed against tax....

----------------------------------------------

Example 2

Mr A owns a flat in central London, which he bought ten years ago for

125,000. He has a mortgage of 80,000 on the property. He has been offered a job in Holland and is moving there to live and work. He intends to come back to the UK at some time. He decides to keep his flat and rent it out while he is away. His London flat now has a market value of 375,000.

The opening balance sheet of his rental business showsMortgage 80,000 Property at MV 375,000 Capital account 295,000

He renegotiates his mortgage on the flat to convert it to a buy to let mortgage and borrows a further 125,000. He withdraws the 125,000 which he then uses to buy a flat in Rotterdam.

The balance sheet at the end of Year 1 shows

Mortgage 205,000 Property at MV 375,000 Capital account B/F 295,000 Less Drawings 125,000 C/F 170,000

Although he has withdrawn capital from the business the interest on the mortgage loan is allowable in full because it is funding the transfer of the property to the business at its open market value at the time the business started. The capital account is not overdrawn.

Yes, the new Schedule A rules allow for interest to be treated as an expense. So if a full set of accounts were drawn up, all of the interest could be deductible.

However, any creative loan financing (especially among family members) is unlikely to achieve any tax reduction. :)

--quote

186. Similarly, the interest on a loan or overdraft may not be allowable, or only part may be allowable, where the borrowing is, for example, used: · to buy non-rental business investments (which may be shown in the balance sheet as assets); · to buy private assets or assets for your family; · for the provision of the private funds you take out from your rental business.

--unquote

The author of that section of BIM may have erroneously picked a rental business as an example to illustrate a general point relating to the taxation of self employed income (Schedule D).

But property income is taxed under schedule A and the rules could be different.

On the other hand, it's conceivable that the rules have changed and that IR150 (last revised 1999) could be out of date.

No, the section 186 is referring to the *possibility* that the deduction may be restricted or disallowed in appropriate circumstances - usually overdrawn capital accounts, but the two other circumstances too.

Cheers guys for all your input, most helpful!

Paul