I am planning on re-mortgaging my residential property on a let-to-buy (BTL) mortgage, which means I will be moving out and renting my residential property and using the funds released to purchase another property for me to live in. The question is: will the interest on the let-to-buy be tax-deductible or not? I bought the property 14 years ago for £190,000 with a mortgage of £150,000. I have a balance left on the mortgage of £7,000, and the remortgage value is £300,000. Will the interest on the £300,000 be tax-deductible (or any portion of it)? If not, in what scenario would a remortgage be tax-deductible if I used the money to purchase BTL properties?
Arthur Weller replies:
If you are getting a new mortgage of £300,000, your property must now be worth somewhat more than £300,000. If so, all the interest on the £300,000 loan will be tax-deductible (as per the ‘section 24’ rules introduced in April 2017) against your rental income, even though you are using the borrowed money to buy another property for you to live in.
See HMRC’s Business Income manual (BIM45700 at Example 2). This is because the borrowed money is less than the value of the property when you introduce the property into your property business (i.e. when you start to rent it out). If you used the borrowed money to purchase BTL properties, then even if the borrowed money was more than the value of the property when it started to be rented out, all the interest would be tax-deductible.