Can I Offset Interest from Our Re-Mortgage?

We wish to raise about £45,000 on two properties that we originally paid cash for 10 years ago, purchase price jointly at £45,000. The money is to be used for the balance on a holiday cottage. 

Can I offset the interest only portion of this mortgage against our other investment property income if we use the holiday cottage for private use only or must we encompass the cottage into our portfolio as a holiday letting?

Since the amount of the £45,000 mortgage does not exceed the amount you paid for the house originally, you are entitled to offset all the interest on the £45,000 mortgage against your gross rental income from all your rental properties. I am assuming that these two properties that originally cost you £45,000 cash are part of your present rental portfolio, i.e. that you actually rent them out. 

Consequently you can use the £45,000 for private purposes and therefore the holiday cottage does not need to be rented out but can be used only privately if you so wish. See page BIM45700, http://www.hmrc.gov.uk/manuals/bimmanual/bim45700.htm, (example 2) on HMRC Business Income Manual.