Re-mortgaging your property portfolio – can you claim relief?

Mon 15 Jan 2018

By Jo White, Tax Consultant at Kreston Reeves

Before mortgage interest relief restrictions were introduced, (April 2017) there was already a potential restriction in place.

Where a property was re-mortgaged, interest could only be claimed up to the value of the property when it was first let. In some instances, properties held for a long time could be subject to this restriction, unless the money was being used to reinvest in the property portfolio. On the flipside if you inherited the property or had a low mortgage and the property value was fairly high, you could re-mortgage the property and use the funds for any purpose and still get tax relief.

Example; the property worth £150,000 when first let. The property increased in value and was re-mortgaged. New borrowings totalled £250,000 and the additional money raised was used to purchase a larger home for the owner to live in. Interest costs of £5,000 were payable per annum on the new mortgage but as only the 60% of the new mortgage is attributable to the original value of the let property, she can only claim £3,000 of interest costs.

However, a recent tax enquiry into another landlord threatens this, which could mean where landlords are refinancing properties, other than to expand their portfolio or help service it, they will no longer be able to get tax relief on the associated interest costs.

HMRC guidance now reads: “If you increase your mortgage loan on your buy-to-let property you may be able to treat interest on the additional loan as a revenue expense as long as the additional loan is wholly and exclusively for the purpose of the letting business”.

For some landlords, this may not be an issue, however it is going to be more important than ever to ensure there is a clear trace of the funds, to prove money has been used for a property business purpose.

It is therefore important to ensure you understand how the financing has arisen on your properties and what it is being used for. Without this paper trail HMRC could seek to disallow a large proportion of the interest costs.

For specialist tax advice please contact Kreston Reeves.