Re-Mortgaging to Release Funds

Clients often get confused about re-mortgaging an investment property or remortgaging (equity release) their own residence. How does it affect the tax relief I receive on interest payments and what are the limits? Lets take a look.

Capital Introduced Principle.

‘Capital’ is an accounting concept and refers to the amount of money that a business owes to the owner of the business. It’s the owners ‘skin in the game’. Always try to think of yourself (the owner) and the business as two separate entities. This approach applies to personally owned property as well as (clearly) properties owned in a limited company.

Let’s take an example.

Keith buys a property on Anglesey in 2021 to use as a Holiday Let. He pays £300k, plus £17k in LTT (stamp duty) and £3k in legal fees. Keith has funded the purchase by £120k pension drawdown and a Holiday Let mortgage of £200k.

His balance sheet on Day 1 of his business looks like this.

Asset	Property Value + Assoc expenditure	£320,000
Liability	Mortgage Owed	(£200,000)
Equity	Keiths ‘skin in the game’	£120,000

Mortgage interest relief can be claimed on borrowings up to the Capital Introduced i.e. £320k, although Keith is currently only claiming on the £200k that is mortgaged.

Release the funds!

In 2023, two years later, Keith and his wife wish to raise some cash for a new motorhome to tour Spain in the winter. To fund this he decides to re-mortgage his own home for £80k as the rates are lower than he can get elsewhere.

Now, you’d think borrowing money to buy a motorhome and tour around Spain would have nothing to do his Holiday Let right? Well not quite. You see, the Holiday Let still ‘owes’ Keith for the £120k he originally put in. So he’s well within his rights to replace that original funding with mortgage funding secured on his main home.

His new balance sheet now looks like this.

Asset	Original Property Value (assume no re-valuation)	£320,000
Liabilities	Mortgage 1	(£200,000)
	Mortgage 2 (secured own home)	(£80,000)
Equity	Keiths original £120k less the £80k now in his Motorhome	£40,000

The funding that Keith was providing from his pension drawdown has simply been replaced with mortgage funding. The overall amount of funding being claimed for mortgage interest relief is still below the original capital introduced. In fact Keith could withdraw a further £40k in the future, as long as he can find someway to replace his own funding.

Summary

Mortgage interest relief can be claimed on borrowings up to the original capital introduced. This is generally the purchase price plus stamp duty plus any legal fees. Arrangement fees should be amortised over the expected timescale of the funding. 

Link to HMRC manuals on the subject – https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim45700

For specialist advise for Holiday Lets and Landlords across North Wales, give us a call for a no obligation chat!