Change to tax relief on re-mortgaged buy-to-let property?
HMRC’s guidance on paying income tax when you rent out a property has been updated to reflect the new restriction on tax relief for finance charges incurred since April 2017. The tax relief on finance costs (such as mortgage interest) used to buy investment properties, is being gradually restricted to the basic rate of tax. The finance costs restriction is being phased in over four years and will be fully in place from 6 April 2020.
An interesting anomaly appears to have arisen in HMRC’s guidance where a taxpayer increases his/her mortgage loan. Previously, the guidance stated that'...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'.
However, this guidance has now been changed and now reads '...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'.
The ability to take out a loan and use this money to fund a withdrawal of capital from your business could be very valuable for some taxpayers. If it can be shown that the additional loan is wholly and exclusively for the purposes of the letting business (in line with HMRC’s revised guidance), then this could mean a change to the tax relief on re-mortgaged buy-to-let property.
However, whether this measure is a change of policy or an erroneous re-write of existing guidance remains to be seen. For now, it’s probably a case of 'watch this space'.