Borrowed Funds and Intended Use

[DaveM]

Hi All

I understand intended use of funds etc for investment vs personal use for deductibility etc.

I have a question though regarding can borrowed funds be used to replace tax paid funds where the use of the tax paid funds was short term lending while an equity release was pending.

Scenario... contract signed on an IP, settlement day closing in, banks are taking their time with equity release. To allow settlement to complete, the equivalent of the equity release is paid for out of savings. Equity release then comes in after settlement and is paid into the loan account.

Can the borrowed funds then be accessed to pay back the tax paid funds as their intended use was for investment?

 

[BMan]

id say yes.
as long as your borrowed fund arent mixed with IP and personal use (ie split it to another account) and dont try and claim any interest

put it this way, you top up your home loan (loan 1) and put the equity into a loc (loan 2) -loan 2 is borrowed
i now buy a car using these borrowed funds (loan 2) -using borrowed funds for personal use
i now pay off loan 2 - its still borrowed

its back to an undrawn loan so its been fully paid off there no contamination on it

to simplify it if the loan is sitting there undrawn it shouldnt be a problem.
if there is part of it drawn out for Income Producing purposes then you would have to split it first then could join them back together again after

 

[DaveM]

Thanks. I am trying to determine if the interest on the extension loan would still be deductible. Its intended purpose is investment, but due to timing it is not ready till after settlement. Unsure if funds can be swapped that way and remain deductible

 

[Adparker]

Thanks. I am trying to determine if the interest on the extension loan would still be deductible. Its intended purpose is investment, but due to timing it is not ready till after settlement. Unsure if funds can be swapped that way and remain deductible

Why not put the cash funds on term deposit and provide them as security to the bank for the additional loan funds required to settle. Then when equity release is ready pay down the additional loan to the original amount. The bank should then allow release of the term deposit. The additional loan interest will be therefore tax deductible.

 

[Terry_w]

Hi All

I understand intended use of funds etc for investment vs personal use for deductibility etc.

I have a question though regarding can borrowed funds be used to replace tax paid funds where the use of the tax paid funds was short term lending while an equity release was pending.

Scenario... contract signed on an IP, settlement day closing in, banks are taking their time with equity release. To allow settlement to complete, the equivalent of the equity release is paid for out of savings. Equity release then comes in after settlement and is paid into the loan account.

Can the borrowed funds then be accessed to pay back the tax paid funds as their intended use was for investment?

No, you can't pay cash for something and then reimburse yourself from borrowed funds and claim the interest. You can't borrow money from yourself.

What you could consider is borrowing from a relative or a trust or a company. This loan could then be refinanced with the bank funds once they come through.

 

[DaveM]

Thanks Terry. I thought that would be the case. Appreciate the options to those who have commented.