Raising a mortgage against a rented property: loan interest deductable from earnings for tax purposes?

• that is wholly owned by him, having been originally acquired with his

• own cash, would the interest on the loan then be deductable from rental

• earnings, for tax assessment? Specifically, I would like to know whether

• there is a distinction, for tax purposes, between a property acquired on

• a buy-to-let mortgage and one that is mortgaged after buying.

Hopefully this tactic is prevented by the exclusion of "borrowing:..... for the provision of private funds to be taken out from the rental business" in .

Since the abolition of MIRAS, many think the tax relief on loans to buy to let to give an unfair advantage to landlords.

More generally, it appears to fail the wholly and exclusively rule.

If the money raised is used to improve that (or another) let property, or to purchase other let properties, then - yes - it could easily be "wholly and exclusively" for the landlord's rental business purposes.

On Monday, February 10, 2014 8:35:07 AM UTC, Adrian wrote:

Perhaps I should further clarify the scenario that I am thinking of?

So, let's say we have a Mr Bloggs, who is employed in a salaried job (nothi ng to do with accommodation or housing). Mr Bloggs is a home owner (one pro perty) with a £150K mortgage.

Now our Mr Bloggs comes into £150K from the death of a relative. Since ba nk interest rates are so low, Mr Bloggs decides to use his inherited money, in a roundabout way, to invest in property. I say "roundabout way" because Mr Bloggs doesn't want to actually use the money he inherited to buy the r ental property. Rather, he intends to pay off the mortgage at his own resid ence, thus freeing-up a sum, from his regular income, which would ordinaril y have been spent on mortgage repayments. Mr Bloggs can now arrange a buy t o let mortgage to acquire the proposed rental property and easily afford th e mortgage repayments. Should he go ahead, my understanding is that Mr Blog gs could count his rental property mortgage interest payments against renta l income, for tax purposes. So, that was his plan. But he deviated from it. ....

Mr Bloggs realised that his current home mortgage had a lock-in period, dur ing which, it would be expensive to pay it off with his inherited money. As an expedient to acquire a rental property, but without checking the tax im plications, Mr Bloggs went ahead and bought a rental property using his inh erited money. His intention was to, at a later date, draw a mortgage agains t the rental property, then pay off his own home mortgage. Upon completion, this process would produce an end result that, ostensibly, is the same as the original intended course of action.

David Woolley's response to the original post suggests that Mr Bloggs' acti ons would exclude him from counting interest on his rental property against rental earnings. However, both Mr. Woolley's reply and your reply, Adrian, use the words "rental business". This makes me think that you are consider ing Mr Bloggs' rental property as Bloggs Properties Ltd (or similar), rathe r than being an altogether less formal enterprise. In other words, I can fu lly appreciate that one could not simply obtain a loan against a rental pro perty owned by one's property company, trouser the money, then claim mortga ge interest against rental earnings. Mr. Bloggs' situation seems rather dif ferent than this, to me. When Mr Bloggs draws the mortgage against the rent al property, he is merely rearranging his financial affairs to best advanta ge, rather than hiving-off money from a business. Can it really be true that in deviating from his original plan, but achievi ng the same end, Mr Bloggs has shot himself in the foot by tying-up his mon ey in a way that cannot allow tax efficiency? If it is the case that there is something sacrosanct about the establishment of a "rental business" at t he point when Mr Bloggs sunk his cash into the rental property, then couldn 't Mr Bloggs himself be regarded as having loaned the "rental business" the money, interest free, for the period up to his drawing a mortgage on it an d paying off the mortgage at his own home?

Cheers.

Jim.

What Mr Bloggs did was separate and distinct from what Mr Bloggs might have done and has separate and distinct tax consequences. You cannot pick and mix from actual amnd hypthetical. And there are good economic resasons for not letting people extract money from a property business by way of loans.

What Mr Bloggs did was set up a rental business with no borrowings. That means he cannot later argue he needs to borrow to pursue the business (unless to expand, carry out improvements etc as Adrian said).

If he had instead borrowed from the outset he would have been able to deduct the interest but he would also have faced other risks - eg of interest rate rises.

I missed this bit. I think you have misunderstood what a property business means. For tax purposes you either have (oversimplifyoing of course) (a) a business which, very broadly, means you set out to make a profit and can deduct expenses, carry forward losses etc or (b) a hobby which the tax system ignores.

(Forget about limited companies. If there were a company owning a house and letting it out the company would carry on the property business. You might own shares in the company, draw a salary as director/employee etc, take dividends but *you* would not carry on a property business.)

I await with interest the outcome of this discussion.

Perhaps Mr Bloggs should have loaned his money to a temporary Ltd company that could then loan money for his investment property.

Of course the Ltd company is a separate entity.

Then when he chooses he can source the loan from somewhere else, pay off the loan to the Ltd company, which in turn can pay off the loan to him, so he can pay off his mortgage.

QED

Not at all. A business does not have to be a limited company. Business activities can be undertaken as a sole trader - as the vast majority of residential landlords do.

A business activity is anything undertaken with the _expectation_ (obviously, reality may differ...) of making a profit. Every residential landlord is doing it as a business activity - whether they know it or not.

On Monday, February 10, 2014 8:03:03 PM UTC, Adrian wrote:

Might I ask whether it matters *when* one expects to make a profit? What ab out if someone buys a house, intending to rent it out, but they need to car ry out a load of repair work, first? What about if, for the whole of that f inancial year, there is no expectation or prospect of making a profit? Woul d the "business" still be regarded as having begun from the moment the hous e purchase was made? If the statement made by an earlier poster (Robin) holds true, referring to the tax consequences of actual versus hypothetical action, (Quote: What Mr Bloggs did was separate and distinct from what Mr Bloggs might have done a nd has separate and distinct tax consequences), then Mr Bloggs would merely have a possible future business rather than an actual one during his phase of net expenditure. He might finish doing-up the house and let it at a pro fit but, alternatively, he might decide to turn it into a hippy free-love c ommune, with no rental income whatsoever. He might just sell it, having dec ided that the landlord game is not for him. He might also decide to abandon the thing and let the weeds cover it, having become bored and exasperated by the scale of the job. We just don't know. We do know, however, that Mr B loggs will not be making a profit in this tax year on his newly acquired pr operty. With all these unknowns, does Mr Bloggs have a "property business" right fr om the date of purchase, or does it depend what was on his mind when he bou ght it?

Cheers,

Jim.

See

which after the summary starts with: "The date a rental business begins is a question of fact that depends on the nature of the rental business. Normally a rental business will begin when the taxpayer first enters into a transaction that exploits their land or property in a way which gives rise to a receipt of some kind. "

But you do really need to read the whole of it.

It was my understanding that you can't set improvements between purchase and first letting against further rental income.

That sort of agrees with your assertion that a rental business only starts with the first tenant.

So best to carry out any work whilst it's being let. Or does the business start when an agent is instructed to look for a tenant?

Depends what you mean by "improvements". You can't set any capital expenditure against income at all. They go against the capital gains if any on disposal. But you get a deduction for repairs etc. See eg

But you can get a deduction for expenditure you incur before you first let a property: see the later part of - very broadly that you get a deduction for expenditure within 7 years of the start which would have qualified if you had already started.

Not for tax reasons given the provision for expenditure incurred before the start of the business. And while I'm not in a position to say how others react to work being done around them, I'd query if I were getting the quiet enjoyment to which I was entitled :)

Might I ask whether it matters *when* one expects to make a profit? What about if someone buys a house, intending to rent it out, but they need to carry out a load of repair work, first? What about if, for the whole of that financial year, there is no expectation or prospect of making a profit? Would the "business" still be regarded as having begun from the moment the house purchase was made?

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Why would someone do this, if they had no expectation of making a profit?

tim