Changes to tax rules on remortgaged buy-to-let property

The scenario is a common one: Mr Smith owns some rental properties. During a tax year he wanted to buy a new home for himself. He raised the funds by remortgaging one of his rental properties. The interest charged on the new loan was claimed as a deduction against his rental income.

HM Revenue & Customs (HMRC) guidance used to allow this; in fact, they even provided an example explaining how it worked, which is now obsolete, as I’ll explain below.

Previous HMRC guidance

“If you increase your mortgage loan on your buy-to-let property you can also treat interest on the additional loan as a revenue expense but only up to the capital value of the property when it was brought into your letting business. Interest on any additional borrowing above the capital value of the property when it was brought into your letting business is not tax deductible.

“Example:

“You purchased a buy-to-let property for £120,000 with a mortgage of £90,000 and let it to a tenant straightaway.

“Three years later the property is valued at £150,000 and you increase your mortgage on the property to £115,000. All of the interest on the mortgage can still be claimed as a revenue expense as the loan doesn’t exceed the initial £120,000 value of the property when it was introduced to your letting business.

“If you increased the mortgage to £125,000, the interest payable on the additional £5,000 is not tax deductible and cannot be claimed as a revenue expense.”

Alas, the above has received a subtle and not well publicised rewrite. Can you spot the difference?

New HMRC guidance

“If you increase your mortgage loan on your buy-to-let property you may be able to treat interest on the additional loan as a revenue expense, as long as the additional loan is wholly and exclusively for the purposes of the letting business. Interest on any additional borrowing above the capital value of the property when it was brought into your letting business isn’t tax deductible.”

How will the new guidance affect landlords?

If we take the above previous example and combine it with the newly reworded guidance, the additional interest charged on the increased borrowing of £35,000 would only be tax deductible if the funds from the new loan are used wholly and exclusively for the purposes of the letting business. Basically, Mr Smith’s plan will no longer work! 

Many landlords have seen this rewriting of the rules as yet another attack on them via the tax regime, whilst non landlords typically see the new policy as being fair and logical.

Either way, if you’re a landlord and have recently remortgaged, you may not be entitled to a tax deduction for the total amount of the interest you’re paying.

If you’d like to discuss this then please contact a member of our specialist tax team on 0330 024 0888 or email enquiry@larking-gowen.co.uk.