Should we Separate the Cattery From the Mortgage?
Q.My wife and I are currently looking into the purchase of a cattery.
My question is - is it better to finance the house separate from the cattery - as in mortgage for the house, business loan for the cattery? Or should we finance the whole lot as one mortgage ?
Normally there is no tax relief on a mortgage for a house purchase but there is tax relief on a business loan.
As you are in the process of purchasing a cattery business it is important that the valuation you receive from the vendor separates the business cost from the purchase price of the property. This might not suit the vendor as there could be capital gains tax for him to pay if the business value has increased significantly while in his ownership.
Conversely, you could find that you will have capital gains tax to pay when you eventually sell the business. So the right time to make these decisions and get the figures right, (which may mean mutually right i.e.. for you and the vendor)is at the time of purchase.
A business loan will in all probability carry a higher rate of interest than a mortgage, particularly at the present time. You will need to speak to your mortgage broker to ascertain exactly what the rates will be. Quite possibly the difference in rates would offset any tax relief you might be able to claim.
It is important to consult both with your accountant and your solicitor during the purchasing procedure. Your accountant will be able to advise you on all up to date tax regulations and hopefully advise you on the best way to proceed.
When purchasing an existing cattery business there will normally be a cost for the goodwill that the vendor has built up over the years. This figure will need to be known so that your advisors can allocate the cost between goodwill and other assets. For some people one way will work and for others the alternative would be better. If you opt to buy the cattery business as a separate transaction you will have the option of making it into a Limited Company. Another advantage could be that if at any time in the future you wanted to sell the business but stay in your property, it would make the transaction much easier.
To sum up; there is tax relief on business loans but not on house purchase mortgages. Strictly speaking they should be separate for financial reasons but it is a balancing act and you should consult with your advisers before you make the final decision.