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Saturday, November 16, 2013

Taxation of new equity release scheme

Many of you will already have had a look at the details of Castle Trust's new equity release scheme which allows landlords to increase the LTV on their buy to let property and not necessarily pay interest on the further advance.

Taxation on new equity release scheme

One landlord has rightly raised the question of taxation on this product.  We know that interests on loans and mortgages are off setable against rental profits on a landlords business.  However, this particular product you do not necessarily pay interest.  I was advised by an accountant friend that guidance on how the HMRC would view this product is available in their guidance on 'Alternative Finance Arrangements' (AFA)

Can you offset interest charges?

This means that interest charges are treated as revenue deductions, as long as they relate to a qualifying purpose (such as property finance/refinance). Even if most of the "interest payment" is  not paid until the property is sold it cannot be deducted from a capital gain.
 
In his view there is an interesting twist for landlords using AFAs, in that they should be able to claim a revenue deduction for interest payable as long as they can reasonably calculate their annual interest costs on an accruals basis. This would probably involve forecasting the lender's return on an eventual sale/repayment date.  This is because interest payable on normal qualifying loans for the purpose of a trade/property business is relieved in the accounting period it relates to not when it is actually paid to the lender.
 
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