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I am in the process of buying a property in Spain and will pay cash for it by mortgaging some of my UK property that is currently mortgage free.
Does anybody know for sure if I can offset the Mortgage Interest from the loans on the UK property against rental income from the Spanish property ?
Obviously this would be the case if the interest were offset against UK rental income but not sure if the Spanish tax authority would accept interest from the UK loan even though it is obvious that the purpose of the loan was to buy the Spanish property.
I cannot comment on the Spanish position. However as I assume you are UK tax resident you will still need to declare this income (using UK rules which would allow this deduction) and then claim double taxation relief.
Chartered Accountant, Tax Advisor and Mortgage broker
(and BTL portfolio owner)
Thanks for the reply, I am a UK tax resident.
Not really sure how the double relief system works, I had assumed that I would only be paying UK tax on the difference between the 19% tax in Spain and whatever rate would be applicable in the UK, or maybe this is wrong ?.
Either way the interest relief would make for a big reduction in tax paid in Spain if they allow it.
Has anybody been in this position and has experience of how it works ?
Not that I know of. I can only deduct my UK mortgage interest from my UK rental income (I remortgaged the property to buy in France and then let it when I left to live in France). Wouldn't you be letting the UK property that you'd remortgaged? Or do you mean you'd prefer to deduct it against the foreign rental income because it would be fully allowed there whereas only 20% is allowed in the UK? If so, sounds a bit dodgy to me and I'm pretty sure the French tax office wouldn't allow it but speak to an accountant experienced in both tax systems
The UK property is already an HMO and rented but as I originally paid cash for it, and its is currently unencumbered, my understanding is that I cannot now claim interest relief for a loan raised on this property as the loan is for the purpose of buying the house in Spain and not the property in the UK.
A few points here.
1) Broadly double taxation relief does seek to do as you expect but it does so by including the income as if it was a UK property and then giving you a form of relief for tax paid. If you are a higher rate tax payer this will of course mean the interest relief restriction bites (ie s24)
2) HMRC have changed their guidance although it is still unclear.and contradictory. Broadly the interest can be deducted if it relates to loans up to the value of the property plus profits. The recent change is that any increased borrowings need to be applied to the business (ie not extracted for non business purposes). On the basis that your Spanish property will form part of the same business I think you are ok here (I assume that neither are FHL as their it would be two businesses). Not sure why your existing advisor said otherwise. Are we missing some additional facts?
3) You will struggle to get a multi-jurisdictional tax advisor without paying through the nose. Its a niche market,. You are better having two advisors.
Sorry I missed this reply before. To be honest I do not have a tax advisor and I rely on info gained from the internet and forums.( maybe I should get one )
I read somewhere that HMRC treat foreign rental income and UK rental income as separate entities and not part of the same business. Therefore reliefs/losses ect from one business cannot be offset against the other. Perhaps I misunderstood this ?
You are right. Usually when I see multiple property businesses they are all UK based. Overseas and UK property businesses do need to treated separately for IT but not necessarily for other taxes. However there is a loophole (if you can get it to work which I have not got my head round yet!) if there are no Spanish profits (taxable in the UK) then it is not an overseas property business as far as HMRC are concerned. (s263 ITTOIA)
The revised guidelines (not universally agreed) are trying to limit extracting capital from a property business. So you need to be sure that you are not doing that. If there is no Spanish property profits in the UK eyes, then what have you done with the funds. Either the Spanish property is part of a single business or it has been extracted by yourself (with interest restrictions).
If you did extract a loan from the UK property business, then the interest on this (fair and reasonable apportionment basis) would be (if you buy the new guidelines) would not be tax deductible against UK rent. However from a UK DTA perspective it would be tax deductible against profits from Spain. So as usual it is all down to relative tax rates between Spain and UK. In my experience Spanish tax rates are far higher so the key point is getting Spanish tax advice not UK - that's a simple application of DTA rules.
Of course how you allocated centralised overheads to your business will be important.
And of course you could refuse to accept HMRC new guidelines and risk going to court!
I didn't pick up that both properties would be in the same business - my comments were made from the point of view of owning each property as a private individual.We do get accountants in France that are qualified in both countries so I would have thought you would find one in Spain.
For instance https://www.spainaccountants.com/about-us