Tax Tip: Refinancing your property

Interest on loans for the purchase of rental property is tax deductible.  For most Landlords, loan interest is their largest cost of doing business. At some point most Landlords consider refinancing an investment property to release further capital. However care should be taken to ensure that the loan interest on the extra funds released will also be tax deductible.

What the Inland Revenue say

According to Inland Revenue guidance, tax relief on mortgage interest is only available to purchase a property which is used for a rental business, or to fund repairs, improvements and alterations. A Landlord can also claim tax relief for improvements to his own home so that a room can be let under the rent-a-room scheme.

If you remortgage a rental property and use the proceeds to pay off your own domestic mortgage or go on holiday, then you will not be able to claim tax relief and you may have to pay other taxes.

How to manage your drawdowns properly

When remortgaging a rental property to release equity, Landlords should:

1. Keep the proceeds in a separate account away from your own cash
2. Keep a record of all withdrawals from the account and show that the money is spent on purchasing further rental property, repairs, improvements or alterations.

As with anything to do with tax, each individual’s circumstances are different and it is best to seek independent financial advice before refinancing.