If I borrow money for deposit towards buy to let mortgage, is that interest is also tax rebatable?

Question

I am planning to buy a buy to let property. I am raising money from my residential home to put deposit of 25 percent. I am aware that i can claim tax for the interest on buy to let mortgage. What i want to know is whether i can claim tax on the interest I will be paying for the deposit money as well.

For example, £100,000 property. 25,000 raised from my current home. Say i pay £200 interest towards that.

75000 mortgage for the buy to let property. 500 interest. Rent is £750.

a. If i can claim tax for both the interests, then my tax liability is only£30 (750-(500+220)). (For this calculation i have ignored other tax benefits).

b. interest on deposit is not tax claimable and my tax liability is £250 (750-500).

Which scenario is correct.

Many thanks for your help

Sen

Answer 1

I think that you are proposing a risky course of action Sen.  If you borrow against the equity in your current home to fund the deposit on a buy to let purchase you will, in effect, be buying on a 100% mortgage. If the housing market plummets - and dont think it cannot happen, about 15 or so years ago the house prices dropped by around 40% in 3 years! (a house i rented out instead of selling would have sold for 76k, 3 years later when i sold it the best i could get was 46k !!!)

you could end up with a substantial negative equity situation.  Plus none of us have a Crystal Ball - you may be a high earner today, a year from now you could be a non-earner with your own home at risk.

Not going to happen you say - well, 12 years back my salary level dropped by 50% in 4 months when i lost around 60% of my hearing in both ears after a short illness and was no longer able to do my previous job!  

Answer 2

As long as you can show that all funds went towards the purchase of the property, then all interest paid will be tax deductible.

Answer 3

B is correct. You only get tax relief on the money you pay to the mortgage lender.

Assuming you are in the UK