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Offsetting interest charges when using personal loans - by Arthur Weller and Amer Siddiq

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Offsetting interest charges when using personal loans - by Arthur Weller and Amer Siddiq

Tax Article

Releasing equity from your personal home is not the only way to raise finance for your investment property.

In fact sometimes it is much quicker to raise finance by applying for a personal loan. In this article we will look at the most common reasons for using personal loans and when the interest charges can be offset against your rental income.

If you take out a personal loan that is used ‘wholly and exclusively’ for the purpose of the property, then the interest charged on this loan can also be offset.

The important point to note here is that personal loans must be used in connection with the property.

Following are some typical property investment scenarios detailing when the interest charged on a personal loan can be offset against the property income.

Loan used for providing deposit

Most buy-to-let mortgage lenders require you to provide a 20% deposit before they will lend you the remaining 80% in the form of a mortgage.

If you don’t have the 20% deposit, then it is likely that you may well need to finance the deposit by getting a personal loan.

If you do take out a personal loan for the 20% deposit, the interest charged on this loan can be offset against the property income.

If you are considering doing this, or have already done this, then what this means is that you have a 100% financed investment property, where interest charged on both the mortgage and the personal loan can be offset against the rental income.

Case Study

Ali is desperate to buy his first investment property after seeing his pension fund plummet and his house value almost double within 5 years.

Unfortunately, (due to his lavish lifestyle), he has no savings of his own but is in a well paid job, earning £40,000 per annum.

He sees an investment property advertised for £100,000, but his mortgage lender requests a deposit of £15,000.

He sources this deposit by acquiring a personal loan at a rate of 9% per annum.

The bank then agrees to finance the remaining £85,000.

This means that Ali has a 100% financed investment property. Therefore he is able to offset the interest charged on both his loan and the BTL mortgage against his rental income.

Loan used for refurbishments/developments

Periodically, you will need to refurbish or even develop a property.

Imagine that you have just purchased a property that needs totally re-decorating and modernising. If you take out a loan for this kind of work, then the interest charged on the loan can be offset against the property income.

Alternatively, you might decide to embark on a more expensive property extension, e.g., to build a conservatory.

Again, the same rule applies here: The interest charged on the loan can be offset.

Case Study

Karen buys an investment property for £100,00. She manages to pay the 15% deposit from her own personal savings and the remaining finance is acquired on a BTL mortgage.

Before letting out the property she decides that a new bathroom suite will greatly increase the chances of the property getting let quickly. She prices a replacement bathroom suite at £2,000.

Unfortunately she has already stretched her personal savings account by funding the deposit for the property.

Therefore she applies for, and is successful, in obtaining a £2,000 personal loan at an interest rate of 10%.

Because the personal loan is used to replace the bathroom suite in the investment property she is able to offset the entire interest charged on the loan against her rental income.

Loans used for purchasing products

If you purchase goods from retailers where finance is available and these goods are used in your property, then the interest charged can also be offset.

This is more likely to happen if you are providing a fully furnished property, e.g., a luxury apartment.

If this is the case, then you may decide to buy the more expensive items on finance.

Such items are likely to include

  • sofas, dining table & chairs, beds;
  • cooker, washing machine, fridge/freezer;
  • carpets, flooring, etc.

If you are paying for these products over a period of time (e.g., 6, 12, or 18 months), then any interest charged by your creditor can be offset against your rental income.

Loans to continue the running of your business

There may be occasions when you need to borrow money because your need to pay some bills or employees but do not have sufficient funds in your account.

In such circumstances you may decide to apply for a short-term loan to make these payments. Again the interest charged on the loan can be offset against the property income.

Interest on overdrafts

If you have a separate bank account set-up for your property investment business then you may decide to apply for an overdraft rather than a personal loan.

If you decide to so this then as long as the overdraft is used for the purpose of the property business then you can offset the interest charged on the overdraft.

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About Arthur Weller

Arthur Weller is a Chartered Tax Advisor (CTA) and an integral part of the Property Tax Portal team. He offers a special rate tax advisory service on any aspect of UK taxation, including property taxation, for as little as £87 for a 30 minute telephone tax consultation.

 

To learn  more about this service click here.