As most buy to let landlords are aware there have been a number of changes in how their income will be taxed, most significantly with the phased restriction in relief for mortgage interest. This means that by 2020/21 relief will be restricted to a basic tax reduction only.
In addition to this major change in legislation, HMRC appear to have somewhat sneakily changed its “view” on whether or not tax relief is available for “new” borrowings taken out on buy to let properties.
Previous guidance issued by HMRC in their tax guidance manuals was clear in addressing a fairly common scenario: if a landlord buys a property with, say, a 65% loan to value mortgage and pays the balance of the purchase price from their own funds. (E.g. A property is purchased for £200,000 with a mortgage of £130,000). Sometime later the property increases in value and the landlord re-mortgages, using the increased funds available to repay some, or all, of the original capital they had used to pay the balance of the original purchase price. (E.g The property is revalued at £300,000 and is re-mortgaged for £195,000, with the original mortgage being redeemed and the “additional” £65,000 used to repay most of the capital originally provided by the landlord).
In such a case HMRC’s guidance was clear in that, as long as the total borrowings did not exceed the original purchase price (£200,000 in our example) then the entire mortgage interest paid on the new loan would be available to offset against the income received from the property (this would of course now be subject to the basic rate restriction referred to above). However, HMRC now seem to be moving the goalpost even though there has been no change in the relevant legislation.
In HMRC’s updated property income guidance they now state, “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 key words here are “…as long as the additional loan is wholly and exclusively for the purposes of the letting business”. HMRC do not appear to have clarified anywhere what they mean by “.. wholly and exclusively for the purposes of the letting business”, but it does seem to leave the door open to them being able to challenge claims for interest relief where landlords seek to re-mortgage in order to repay some of their original capital investment.