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Re-mortgaging partners
Following on from the query by 'Debtor', (Taxation, 11 November 2004, page 166), a partnership had traded for many years from business premises, owned by all the partners in profit sharing ratios. The freehold was included in the partnership accounts at cost, and interest payable on the loan to acquire the freehold was debited in the profit and loss account.
Re-mortgaging partners
Following on from the query by 'Debtor', (Taxation, 11 November 2004, page 166), a partnership had traded for many years from business premises, owned by all the partners in profit sharing ratios. The freehold was included in the partnership accounts at cost, and interest payable on the loan to acquire the freehold was debited in the profit and loss account.
The partnership incorporated on 1 September 2004 and the business freehold was retained by the partners, rather than transferring it to the company. A lease was entered into by the company for the use of the premises at full market rent. The value of the freehold has increased significantly and the owners of the freehold have re-mortgaged to a figure in excess of original cost.
What will the amount of allowable interest be against rental income: (a) the amount of the original loan for the purchase of the freehold; (b) the amount of the original cost; or (c) the total amount of the re-mortgage loan?
I have considered the examples shown in the Revenue's Business Income Manual at para BIM45690 et seq and wonder whether this also applies to the above situation where the freehold enters the rental business on 1 September 2004 at its then market value, rather than cost.
Readers' views are most welcome.
(Query T16,547)
