A buy to let mortgage is typically taken out at the time the property is purchased. As such it falls within HM Revenue & Custom’s guidelines of an expenses needs to be “wholly and exclusively” for business purposes to be tax allowable.

However, if you were to draw additional funds on the mortgage eg for a holiday that element of the interest would not be tax allowable.  That is because what is relevant is not whether it is a buy to let mortgage but what the funds will be used for.

If you draw on a buy to let mortgage for a non property related expense the interest on that part of the loan would not be allowable.

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For tax purposes all income and expenditure must be on accruals basis. This means that it is irrelevant when you are invoiced or when you pay for an expense. What is relevant to the taxman is when the income or expenditure arises.

So for example, let’s assume you have repair work done to your property on 29^th March 2009 but you don’t get invoice until 10^th April. Even though you didn’t receive the invoice or pay for it until the following tax year, the expense needs to go into your tax return for the period to 5^th April 2009. The rule is you need to include the expense in the return for the year in which the expenditure was incurred- not the year in which it is paid.

The same rule applies for income. So rents which are due for the year but are not received until the following year must also be included as income for the relevant tax year.

You must therefore look carefully at all income and expenses paid and received in the period following the tax year to see if any items need to be accrued for the previous tax year.

If you want more advice on tax please see http://www.marywaring.co.uk/propertytaxsecrets.html

If you take out a buy to let mortgage on your investment property, interest (but not any element of capital repayment) is allowable as a tax expense against the rents received.

However, did you also know that if you took out any other borrowings to buy the property interest on that is also allowable?

Therefore, suppose you’ve taken out a buy to let mortgage on the property itself for 70% loan to value and the 30% deposit has been funded by an increase in the mortgage on your main residence. In this instance you can charge the interest on the buy to let mortgage. However, you can also charge the interest on the deposit element which has been funded by increasing the mortgage on your home.

The same principle applies if you’ve taken out a personal loan or are paying interest on a credit card for costs related to a property investment. These expenses are allowed, provided you have adequate tax records to ensure you can justify they are “wholly and exclusively” for the investment property.

If you are likely to be buying things on a credit card for the property I would suggest you use a separate credit card, only used for property transactions. So that if you do incur interest you can easily identify it as being part of your property expense.

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http://www.marywaring.co.uk/propertytaxsecrets.html

You must advise the taxman in the first year in which you own a property investment. For those of you who already receive a tax return you need to obtain the Land & Property supplement pages L1 and L2 from the tax office.

If you are one of those who do not have to do a tax return, (eg. Because you are under the PAYE system) then you must notify the tax office that you effectively have a new source of income.

If you own more than one property then you would certainly want to calculate the profit and loss from each property. That will allow you to see how well each property is performing. However, for tax purposes the profits and losses can be set against each other and effectively treated as a single rental business. So you only complete one return for all your properties.

Effectively what this means is that the rent from one property can be used to offset expenses from another. Therefore if you have one property that makes a tax profit and another property that makes a tax loss, the 2 results get netted together.

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