Claim the RIGHT amount of interest.

First off all landlords can still claim tax relief on mortgage interest. Higher rate landlords can’t claim quite as much relief as they used to be able to but the first point to note is that interest should still be put on your tax returns!

The next point though is about how much of the interest should be on the return. Landlords get up to all kinds with mortgages and borrowing. They remortgage properties, pay down mortgages, borrow against one property to put down on another and much much more!

One area where people get real confused is on remortgaging though. Let’s cover a simple example.

Don

Don buys a house for £100,000 using his own cash.

Three years later the house has increased in value and the bank allow him to remortgage and he takes £100,000 against it. The value at the time was £150,000.

Don buy’s a yacht.

Don can claim all of the interest on this mortgage.

Yes! – Even though he bought a yacht. For clarity the yacht is for fun and has no business reason to exist at all.

Why?

Well this might baffle you but here is the reason he can. Property income has for many years been treated as a business for the purposes of record keeping and accounting. The calculation of profit is covered by HMRC Business Income Manuals and buried away in there, in BIM45700 is the following statement:

“A proprietor of a business may withdraw the profits of the business and the capital they have introduced to the business, even though substitute funding then has to be provided by interest bearing loans. The interest payable on the loans is an allowable deduction. This is on the basis that the purpose of the additional borrowing is to provide working capital for the business. There will, though, be an interest restriction if the proprietor’s capital account becomes overdrawn, see BIM45705 onwards.”

Note that nowhere here does it mention what the money is used for by Don. So far as the business is concerned the mortgage swapped out Don’s financing. It was essentially a remortgage where Don was the original lender and the bank replaced him. No different to swapping BM for Paragon.

Note that if he had gone above the original cost, or more precisely the value of the property on the day the rental business started, then the amount of interest would be pro rated based on the value/total borrowed.

So if he had taken £120,000 out he would be able to claim £100,000/£120,000 of the interest. Make sense?

How do I track all of this?

You will be largely fine if you ensure that the total amount borrowed does not exceed your original base costs.

It’s worth noting there though that just as many people are over claiming as they are under claiming!

Are you claiming the right amount?