Buy to Let Allowable Expenses?

anselld

OK, I think I see. Any money you might save in tax on your rental income you end up paying out as tax on the capital you kept in the bank. (and vice versa)

So, assuming you generally pay more interest on borrowing than you can make on savings (net), you are better off funding the capital yourself if you can.

Yes?

CLAPTON

yes indeed assuming all other things are equal (eg you don't need access to the 'saved' money for other things )

anselld

.... and therefore it wouldn't make sense to cash in ISAs to fund it either.
I think I am getting there now :-) Many thanks.

CLAPTON

It's too easy to allow the idea of tax free to cloud one's judgement.... as they say don't let the tax tail wag the dog


The simple maths are... if the net rate of interest you receive on your savings is greater than the net rate (after renting tax relief) on the mortgage then save, otherwise use your savings.

So at the moment its difficult to get more than 4% on savings but you may well be paying 6% on a BTL mortgage .. so even allowing for 20% off the mortgage rate for tax refund you are paying 4.8% on the loan and receiving only 4% on the savings (if in an ISA or only 3.2% if tax is payable.

You need to put in your specific figures before deciding to cash in ISAs but its likely that it does indeed make sense to do so.

ncooper1974

RainMaker wrote: »

However, having invested your own savings to finance (or part finance) the BTL, you could at any time in the future re-mortgage the BTL to pay yourself back the capital that you had originally invested. The interest on this additional borrowing is an allowable expense.

Just so long as the additional borrowing is not MORE than the original value of the property.

i.e. you buy a flat for £100k, and borrow £80k.
flat increases in value (not for a long time mind) to £150k, and you remortgage to borrow £130k.
As I understand it, you CANNOT still offset the interest on the £130k mortgage, but only upto to the original purchase price of the property.

silvercar

ncooper1974 wrote: »

Just so long as the additional borrowing is not MORE than the original value of the property.

i.e. you buy a flat for £100k, and borrow £80k.
flat increases in value (not for a long time mind) to £150k, and you remortgage to borrow £130k.
As I understand it, you CANNOT still offset the interest on the £130k mortgage, but only upto to the original purchase price of the property.

I agree. The interest is only an allowable expense upto the value of the property when first let (+ the cost of improvements).

Those in negative equity, letting their property because they can't sell should be careful of this. It is only the value when first let that is an allowable expense. If you bought for £200k have a mortgage for £190k and the current realistic value is only £170k, it is the interest on £170k that is an allowable expense.