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What is the tax situation for claiming interest relief on ‘offset mortgages’?

Question With the popularity of offset mortgages such as the Virgin One Account, one interesting case study would be:

‘John takes a drawdown mortgage on his residential property for £100,000 solely for the purpose of purchasing a buy-to-let property. The drawdown mortgage is offset against his current account, and as he has £80,000 worth of savings in his current account, he is effectively only paying interest on £20,000. Can John offset the property income against the full £100,000 loan, or only the £20,000 loan?’

I wonder what Mr Inland Revenue's opinion on this would be?

Ian Says:

The maximum amount of interest deductible is that which is paid, so you would only get relief on the £20,000 in this case. It may be better to take out a separate loan to get the full interest relief and get the interest on the savings than to use an offset account in this way, given that tax relief is given on the interest paid.

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