Question of interest over second property tax
When a client sought clarity on the tax position of owning two homes, one in London, one in the West Country, the Tax Discussion Group focused on whether the interest from re-mortgaging one property to buy the other would be either a tax reducer or deductible from rental income.
The accountant explained that his client owned a London property worth around £500,000. He plans to acquire a property in the West Country for around £200,000 and he plans to spend £50,000 on refurbishing the property to meet his specific needs from this property.
He plans to remortgage his London property for £250,000, and to let this out to third parties. He is also planning to live in the West Country property while it is being refurbished. The client has asked the accountant to confirm his tax position in relation to the property.
The accountant explained he had set out that the additional rate of stamp duty land tax (SDLT) would apply to the acquisition of the West Country property. Additionally, it would also become his main residence for capital gains tax (CGT) purposes, and his London property would lose its main residence relief at the end of the deemed occupation period.
The client was not moving to the West Country as part of their job, and so the deemed occupation rules would be limited to the final period relief.
The accountant had set out the allowable costs for the rental expenses to his client, but was very confused regarding the amount of mortgage interest relief that would be available. There were differing views in the Tax Discussion Group regarding the amount of interest that could be included in the client’s tax return. It was noted that the mortgage interest would be within the transitional period for mortgage interest reduction rather than fully deducted as an expense.
The disagreement concerned whether the mortgage interest would be allowed or not due to the use of the mortgage monies to acquire the main residence that the client was to live in. The majority attending felt that the fact that the London property had not previously been rented out meant that the mortgage interest would be allowable as a tax reducer, and partially as a tax-deductible expenditure. If the property had previously been rented out, and therefore his rental business had commenced, then the remortgage would need to be restricted to the initial cost of the property and subsequent improvements.
Each month (with the exception of July and August) the Tax Discussion Groups in Croydon & South East London meet to discuss client tax issues on a no-names basis. These meetings are free to attend and normally cover over a dozen tax issues raised by those attending.
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