Extracting equity from a B2L

[MarillionFan]

An accountant may be along shortly to correct me, but I didn't think this was the most tax-advantageous way of doing things.

You might be adding £200k onto your BTL mortgage, but you would not be able to claim any interest expense on it because the money has been used privately.

The interest is offset. If he chooses to invest elsewhere and make more money he has to declare that and pay tax.

[b0redom]

An accountant may be along shortly to correct me, but I didn't think this was the most tax-advantageous way of doing things.

You might be adding £200k onto your BTL mortgage, but you would not be able to claim any interest expense on it because the money has been used privately.

Do you have a reference to that? My IFA isn't sure and my accountant doesn't know either.

[b0redom]

The interest is offset. If he chooses to invest elsewhere and make more money he has to declare that and pay tax.

....on the interest on the new investment right?

[ContrataxLtd]

That was my understanding too. I seem to remember reading though that you can only claim relief on the interest payments up to the value of the house when you first let it, so if you bought it for £200k, let it immediately, and then the value of the house goes up to £500k, and you up the mortgage to say.... £400k, you can still only get relief on the interest payments up to £200k.

All pretty academic though, since George is removing the interest relief imminently.

Hi b0redom

I think I've been reading NLUK's posts too much lately, heres a linky to a previous thread we discussed this on

http://forums.contractoruk.com/accou...y-out-b2l.html

and the HMRC manual that covers this: BIM45700 - Specific deductions - interest: Withdrawal of capital from a business

Basically tax relief on the interest is restricted to a loan in value that doesn't cause your capital account to become overdrawn and your capital account is normally equal to the value of the property when it was introduced to the business. Your accountant should be able to do some workings in respect of your capital account to ensure this doesn't become overdrawn and thus some interest needing to be disallowed.

I think MF may have an issue if his rental business is looked at in close detail.

Hope this helps.

Martin
Contratax Ltd

[b0redom]

Ah right. Forgot I'd asked previously, that's probably where I remember reading before.....

So assuming that it when I first let it, it was worth 300k, that's my capital account limit, and I can pull funds out up to that point, but anything over and above that is non-allowable for interest relief purposes?

How do HMRC value the property when I first let it out?

[ContrataxLtd]

Ah right. Forgot I'd asked previously, that's probably where I remember reading before.....

So assuming that it when I first let it, it was worth 300k, that's my capital account limit, and I can pull funds out up to that point, but anything over and above that is non-allowable for interest relief purposes?

How do HMRC value the property when I first let it out?

Yeah that's pretty much it but you have to take into account any mortgage on it when you first let it out too as you are only deemed to be introducing the equity in the property when first letting it out. There is also a chance that you have increased the capital account by introducing capital (paying for things personally) and not withdrawing the rental profits each year.

If you bought the property purely to let out then the value is just what you paid for it, if it was your main residence etc. and you moved out then started to rent it ideally a valuation would have been done around the same time. Perhaps you thought about selling and had an estate agent value it? If you did this would be a good starting point, if not, a reasonable estimate should be used that would be justifiable if HMRC ever open a compliance check into your affairs.

Martin
Contratax Ltd

[MarillionFan]

I think MF may have an issue if his rental business is looked at in close detail.

Hope this helps.

Martin
Contratax Ltd

If you think that's iffy, you should see how my combination of a SIPP purchasing a shop, renting it back to myself as self employed and paying my wife to run the shop so it always makes a loss which in turn can be offset against my personal taxation so I get a tax rebate 'plan' pans out.

[ContrataxLtd]

If you think that's iffy, you should see how my combination of a SIPP purchasing a shop, renting it back to myself as self employed and paying my wife to run the shop so it always makes a loss which in turn can be offset against my personal taxation so I get a tax rebate 'plan' pans out.

I can see what you're trying to achieve there, sounds like an interesting plan to say the least...............

[b0redom]

Presumably this will all be largely academic anyway as all the relief on the interest payments will cease next year?

[ContrataxLtd]

Presumably this will all be largely academic anyway as all the relief on the interest payments will cease next year?

I've taken this from a post i made in another thread:

The government will restrict the amount of income tax relief landlords can get on residential property finance costs to the basic rate of income tax. Finance costs include mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan.

Landlords will no longer be able to deduct all of their finance costs from their property income. They will instead receive a basic rate reduction from their income tax liability for their finance costs. To give landlords time to adjust, the government will introduce this change gradually from April 2017, over four years.

The restriction in the relief will be phased in as follows:

in 2017/18, the deduction from property income will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
in 2018/19, 50% finance costs deduction and 50% given as a basic rate tax reduction
in 2019/20, 25% finance costs deduction and 75% given as a basic rate tax reduction
from 2020/21, all financing costs incurred by a landlord will be given as a basic rate tax reduction.


This restriction will not apply to landlords of furnished holiday lettings.

At the moment I'm not entirely sure how the tax reduction will work and whether it will be available against any tax due on the rental or against total tax. The later sounds quite generous but I'm thinking it will be the former which means high rate tax payers with rental properties making a loss could be significantly worse off it the tax reducer isn't available to carry forward.

Hope this helps

Martin
Contratax Ltd