Landlords Beware – Potential block on loan interest relief for capital withdrawn from letting businesses

HMRC recently amended their existing online guidance on the subject of tax relief for interest paid by taxpayers on relevant loans, but in particular when remortgaging properties in their letting business.

If this update reflects a genuine change in HMRC policy, it will impact thousands of buy to let owners.

Previously

Buy to let landlords, or Individuals with rental businesses, had been able to remortgage their properties and extract the additional capital for their own personal use, or for a purpose completely unrelated to the rental business, while still being able to deduct the interest against their rental income for tax purposes. As long as the sum withdrawn from the business did not exceed the original value of the property when it was first let, and the capital account was not overdrawn, then the full amount of interest was tax deductible in calculating the assessable rental income.

Amended

A recent tax enquiry case has shown HMRC taking a completely different view, highlighting changes to existing guidance, and indicating that any loan interest paid on the capital withdrawn, will only be treated as an allowable expense for income tax if the capital is then used wholly and exclusively for the purpose of the letting business. This means that if the capital is used elsewhere, there will be no tax relief available for the interest charged.

This particular enquiry case is being challenged by the taxpayer involved, and will soon be taken to the First Tier Tax Tribunal. In the interim, many stakeholders and associated professional bodies have expressed their disappointment in HMRC seeking to implement changes to existing guidance without any notification or consultation.

It is still unclear if this restriction in relief is actually an unintended consequence of the rewritten guidance, but there is no doubt that this will have wide reaching implications for landlords, both for those who have already leveraged against their properties, and those who are currently considering the same.

We will continue to monitor the position, as we want to be able to provide certainty for landlords going forward.

For more information, please contact Lynn Gracie or your usual AAB contact.