A backdoor restriction on buy-to-let interest relief?

Buy-to-let investors beware. HMRC have retrospectively changed their guidance which has led to enormous uncertainty.

If you are a buy-to-let landlord you probably bought your property using a combination of your own capital and a mortgage. Ever since, you have received some tax relief on the interest you pay on the loan.

In the past if owners increased that mortgage to take their initial investment back from the business it was believed that HMRC allowed them to set the additional interest against their rental income irrespective of how the cash was used.

However, HMRC have recently amended their guidance to ‘clarify’ this was never their view.

Example

James purchased a property for £150,000 using £100,000 mortgage and £50,000 cash. The mortgage interest on the £100,000 was set against the rental income for tax purposes. Some years later James needed £25,000 to buy a new car. As this amount did not exceed the original value of the property when it was first let, and the capital account was not overdrawn, under the old guidance interest on the £25,000 would be deductible against the rental income. Under the revised guidance, the additional loan of £25,000 for a new car is not considered by HMRC to be ‘for a qualifying purpose’ and they believe that the interest on the £25,000 is not tax deductible.

Going forward

A recent High Court case discussed the circumstances where HMRC arbitrarily change their guidance and the Court ruled that a taxpayer could not rely on the legality of the guidance. It will be interesting to see how this latest change of view will be received by the courts and whether HMRC will be looking at historic positions. Care is needed when structuring finance for buy-tolet properties to ensure maximum relief is granted.

If you have any further questions please email pem@pem.co.uk

Comment

Latest from PEM

PEM Corporate Finance advises on succession buyout at Bailey Fisher

14/08/2018 - 16:35

Bailey Fisher Executive Search, a leading Cambridge and London firm focussed on the hiring of senior executives to some of the most successful companies based in the UK, has announced changes to its ownership structure which will further strengthen the business. PEM Corporate Finance acted as lead advisers on the succession buyout.

Read more >

Our culture

13/06/2018 - 12:28

Happiness and well-being is important to us. This emphasis on creating a positive culture where people can thrive is key to our success in attracting and retaining talented employees.

Read more >

PEM Corporate Finance advises on sale of leading energy management company

11/06/2018 - 21:10

eSight Energy Group Ltd, a leading developer and supplier of energy management software, is pleased to announce the sale of the company to German private equity firm, BID Equity. The acquisition enhances BID Equity’s position as an IoT (Internet of Things) provider focused on the energy sector and represents an exciting new growth phase for eSight Energy.

Read more >