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Use your investment properties to reduce the mortgage on your private residence and still offset the interest charged against your rental income – By Arthur Weller and Amer Siddiq

Ever since Maurice Parry-Wingfield (Tax Director at Deloitte), mentioned paragraph 45700 from the Inland Revenue Business Income Manual, accountants and tax specialists have been highlighting the potentially huge benefits this can bring about for landlords.

In the 18 September edition of the Financial Times, Maurice Parry-Wingfield drew attention to the fact that paragraph 45700 gave landlords the opportunity to release equity from their investment properties and offset the interest regardless of what the equity release was used for.

The only restriction is that the equity release cannot be greater than the market value of the property when it is brought into the letting business. If the property had been originally bought for letting, this amount would be the purchase cost of the property.

In paragraph 45700, the Inland Revenue provides the following example:

‘Mr A owns a flat in central London, which he bought ten years ago for £125,000. He has a mortgage of £80,000 on the property. He has been offered a job in Holland and is moving there to live and work. He intends to come back to the UK at some time. He decides to keep his flat and rent it out while he is away. His London flat now has a market value of £375,000……He renegotiates his mortgage on the flat to convert it to a buy to let mortgage and borrows a further £125,000. He withdraws the £125,000 which he then uses to buy a flat in Rotterdam.

The Inland Revenue goes on to say that ‘Although he has withdrawn capital from the business the interest on the mortgage loan is allowable in full because it is funding the transfer of the property to the business at its open market value at the time the business started. The capital account is not overdrawn’.

Here are some more case studies to explain the benefits of this tax break for landlords and homeowners.

Case Study
Benefiting from letting out your own home and increasing house prices

John and Louise buy a house in 1987 for £50,000. They live in it for 14 years and then decide to move to a bigger house. Instead of selling the existing house they decide to let it out.

Over the 10 years the house has been fully paid for and therefore there is no outstanding mortgage.

The value of the house in 2001 is £190,000. The new house that they have seen is £300,000.

In order to provide the deposit for the new house, they re-mortgage their existing house on a buy-to-let mortgage for £152,000. This amount is used to fund the deposit on the new residence, which means that they only need to borrow £148,000.

The entire interest that is charged on the buy-to-let mortgage can be offset against the rental income. This is because it is below the market value of the property at the time of letting.

Two years later the original property is worth £250,000. In order to reduce the mortgage on their private residence, they are able to release an additional £38,000 of equity on the buy-to-let mortgage. This means that they have mortgaged to the amount of £190,000 on this property.

Again, because they have not gone over the market value of the property at the time of letting they are able to offset the entire interest charges against the rental income.

At the same time they have also successfully managed to reduce the interest on their private residence by an additional £38,000!

Once again, if the original property is remortgaged above £190,000 and the money is not used for the purpose of the lettings business then the interest charged cannot be offset against the rental income.

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.