As most landlords are aware, it is not possible to claim interest relief on your main residence.
This is because your main residence does not form part of the property business. However, it is possible to claim interest relief on properties that form part of your property business i.e., your buy-to-let portfolio.
Introducing BIM45700
Paragraph 45700 of HMRC's Business Income Manual (BIM) illustrates how one can release equity from his or her properties and offset the interest regardless of what the equity release was used for.
The only restriction is that the equity release cannot be greater than the market value of the property when it is brought into the letting business. If the property had been originally bought for letting, this amount would be the purchase cost of the property.
So How Do We Get Tax Relief on Our Main Residence?
Well there are two ways to achieve this:
a) Remortgaging existing buy-to-let property/portfolio
The example below shows how/when you can release equity from property you own to give you a tax benefit.
Example
John buys a buy-to-let property for £200,000. He provides a £40,000 deposit and borrows £160,000. 5 years later the property has increased to £250,000. This means that he has £90,000 equity in the property.
He decides to remortgage the property to a value of £200,000 thus releasing £40,000 of equity from the property. He uses the £40,000 equity release to reduce the mortgage on his main residence by £40,000 and still claims interest relief on this equity release.
Now you will be asking how is this possible?
Well, don’t forget the property was brought into the lettings business when it was purchased for £200,000. The additional amount of equity released has not taken the borrowing over £200,000, so the entire interest amount charged can still be offset against the rental income.
b) Moving Equity from Previous Residence
Another useful tax 'trick' is to remortgage a previous main residence. Again this strategy is best illustrated by an example.
Example
Lisa and John buy a property for £100,000 (£20,000 deposit and £80,000 mortgage). They live in the property for five years and then decide to buy another property. Instead of selling their existing residence they decide to get onto the buy-to-let ladder and let the property out.
The cost of the new property is £200,000, and at the time of letting, their previous residence is worth £150,000.
They increase their debt on the previous residence from £80,000 to £150,000 i.e., they release £70,000 of equity. They then use this equity release to reduce their mortgage on their main residence by £70,000.
Once again, because the additional amount of equity released has not taken the borrowing over £150,000 (the price when it was brought into the lettings business), the entire interest amount charged can still be offset against the rental income.
Conclusion
As you can see, sometimes with a little bit of creativity you can bring significant property tax savings! It is possible to get even more creative with this tax break but we’ll leave these strategies for another time.
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