loans for rental property renovations, house loansAs part of the government’s proposed changes to claiming interest deductions against residential property income, the interest deductions for rental properties acquired on or after 27th March 2021 (other than for new builds – but yet to be confirmed) will not be permitted from 1st October 2021. If money is borrowed on or after 27th March 2021 for any rental property repairs or renovations on properties acquired before 27th March 2021, the new loan will be treated the same as a loan for a property acquired on or after 27th March 2021 – therefore interest on it cannot be claimed as an expense from 1st October 2021.

From an accounting perspective, it is more beneficial to draw down a separate new loan for any residential rental property renovations or repairs, rather than topping up an existing loan. This helps to minimise the accounting costs related to calculating the loan interest apportionment between deductible and non-deductible interest. Otherwise you could run the risk of the increased accounting fees for calculations to apportion the interest claim, potentially cancelling out the value of the claim.

This also applies to funding by overdraft or revolving credit. For example, if someone paid back the full balance of their overdraft by 26th March 2021 and then drew down additional funds as new borrowings, the interest on the draw down might be subject to full non-deductibility of interest from 1st October 2021 – under the proposed new rules.

Please contact us if you have questions regarding loans for rental property renovations and the best way to structure them under the proposed new rules.