You may find the notes that follow useful if you raise money by increasing the lending/mortgage in respect of rental property.
The following factors need to be taken into account:
Loan used in property business
Generally speaking if the funds raised from refinancing are reinvested in the property business, for example to purchase new property or refurbish existing property, then any loan interest payable is allowed in full.
Funds withdrawn by property business owners (individuals and partnerships)
If funds are raised to enable the owners to withdraw money from the property business the following considerations need to be taken into account.
- HMRC will seek to disallow interest on any loan in excess of the original cost of the property, or, the valuation of the property when first taken into business use. For example you may own a property that has been your own home for a number of years that you purchased for £100,000. You decide to move abroad and keep the property but let it out; the current value is £200,000. It would be possible to raise a buy to let loan for up to £200,000 (if the banks were willing!) and claim interest on the loan against your rental income.
- A claim can only be made for the interest on the loan not the capital element repaid.
- There are many pitfalls that can result in a loss of tax relief so it is important to obtain advice before refinancing.
Loans taken out by a property business run by a limited company
Where a property is owned by a limited company any additional cash raised by increasing loans secured on the company’s business property belongs to the company. If directors wanted to withdraw the funds for personal purposes they would need to observe the usual rules:
- Vote a dividend
- Take extra salary or bonuses
- Reduce the amount of any loans they have made to the company.
What seems on the surface a simple issue, ‘Can I borrow against business property and get full tax relief on the interest charged’, is far from a simple issue. Please get in touch prior to taking out such a loan to clarify the tax position, especially if you are relying on a tax deduction to make commercial sense of the loan.