Does this mean that you would have to forego tax relief on the Second Mortgage for instance in Uk ?

Posted by admin on July 26th, 2007 at 12:35pm

Q. I live in UK. Can anyone tell me what problems are likely to be encountered if you have a half share in a flat that you don’t live in and want to get a flat of your own. Does this mean that you would have to forego tax relief on the Second Mortgage for instance ? Are there any other obvious things that may cause a problem ?

A. None apart from the usual ones, i.e. the special circumstance of happening to own half a flat is completely irrelevant to whether you might wish to buy another. No. Well, it depends. If you mean mortgage interest tax relief, usually available under the MIRAS scheme, to which you are entitled in respect of your sole or main residence, then you would indeed be entitled to this in respect of the new flat. Of course, you cannot have more than one sole or main residence, so you would have to forgo it in respect of the old flat, but since you don’t live there, you’re already not entitled to it anyway, and if you’ve been claiming it, you’ve been defrauding the taxman. Naughty! What is not widely known is that although you can’t claim MIRAS in respect of a property you don’t live in, you can treat that property as a business. You’re probably renting it out, in which case you’ll be taxed on the profit, but you can deduct various expenses to minimise the profit, such as wear and tear, maintenance, insurance, administration, and, best of all, mortgage interest (but not mortgage capital repayments). Moreover, you count *all* the interest, not just that on the first 30k of loan, and it is not limited to 15% but applies at your full marginal income tax rate. So you’d better draft a grovelling letter of apology to the taxman saying you were unaware that your MIRAS was conditional on you living in the old flat and offer to pay back the measly 15% tax, and at the same time submit a claim for the alternative tax relief, which will of course be much more than what you owe. Oh, yes, and offer to pay the tax on the profit, and submit nice details showing why there isn’t any. Yes. Assuming you need to borrow to buy, you will need to show your prospective lender that you have suitable income to make the payments. Usually they ask for outgoings, and if you have an existing mortgage on the old flat, you’ll need to disclose this, since that tranche of your income will not be available to cover your new payments. If the old flat is self-financing this may not matter, but some lenders are awkward about treating rental income as sufficiently secure, and will be unkeen to lend a high proportion of the value of the new flat. .

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