Interest only for tax purposes on Renting

Brian_Ben_Mac

Here is a problem that I can't solve.

I have a 2nd property I rent out and make a profit. I am a 40% tax payer.

Is it worth increasing the loan on my rental property so that I reduce paying the tax on the profit.

Premier_2

You need to balance what you plan to use the freed up capital for.

Remember, you will be paying probably ca. 7% for any money borrowed by increasing the loan. If you plan to stick the freed up capital in a bank earning say 3.5%, well thats only half the rate at which you're borrowing at and you still pay tax at 40% on the interest earned!

Even if you have to pay 40% on the rental income, remember 60% of something is better than 100% of nothing.

However, if you have plans to make a decent income from the released capital, of course you should release it and benefit from paying less tax too.

chewmylegoff

Brian_Ben_Mac wrote: »

Here is a problem that I can't solve.

I have a 2nd property I rent out and make a profit. I am a 40% tax payer.

Is it worth increasing the loan on my rental property so that I reduce paying the tax on the profit.

one situation which i think you need to look at is your ISA allocation.

if you are not using it then i think it is worth thinking about using it. because the mortgage interest is tax deductible and you pay no tax on the ISA interest it could make it worth you withdrawing £3,600 of equity and putting it into an ISA.

assuming an interest rate of about 7% on the mortgage my rough sums indicate you would only need to earn more than 4.2% on the ISA to make it worth it.

i.e.

£3,600 increase to mortgage. extra interest at 7% = £252

tax saved at 40% = £100

net reduction in BTL profit = £152

tax free ISA interest earned on £3,600 at 4.2% = £151

i.e. break even.

say you get 6% on your ISA you make £216. therefore you would be £64 better off based on mortgage 7% and ISA 6%.

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if you don't have somewhere tax free to stick it then you need to earn more than the mortgage interest with the capital to make it worth it as you are paying 40% tax on your other income.

mlz1413

Does the property need any maintenance or renewals? Spending your profit on keeping the property in good condition is a good way of not paying tax on it.

benood

If you have a mortgage on your main residence it may well be worth reducing that mortgage to increase the mortgage on your BTL. Key will be the differential between the two mortgage rates.