what does this mean?

Euphoria1z

hi

can some one explain what this means pls?

"The interest you can offset against rental income is based on mortgages up to the value of the properties when first let."

thanks

angelapops

I think it means that if you bought the property at market value on a mortgage then you can off set the interest paid against the rents but if the property increased in value and you borrowed more money based on its increased value then you cannot set this further interest against your rents.

Euphoria1z

angelapops wrote: »

I think it means that if you bought the property at market value on a mortgage then you can off set the interest paid against the rents but if the property increased in value and you borrowed more money based on its increased value then you cannot set this further interest cannot be claimed against your rents.

thanks, thats what i thought it meant.
however, according to property investors, you can remortgage your btl for a higher value and not pay tax on it as its a loan. unless they mean no tax on the loan (so the equity released is tax free)

so you can release equity and not pay tax on that, but still have to pay tax on rental income-minus interest on original purchase value? is that correct?

ta.

Elaine_Wilson

Suppose you buy a property for £100,000 with a mortgage of £75,000. You can set all the mortgage interest paid against the rents received, thereby gaining tax relief.

The property goes up in value so you remortgage to withdraw some of the equity. The amount borrowed is not taxed because, as you rightly said, it's just a loan. Let's say you increased the mortgage by £45,000 so the borrowing is now £120,000. In practice you would claim 100/120 of the total interest paid.

If there was a gap between buying the property and letting it the limit will be the value at the date you started letting instead of the cost price.

You can only claim tax relief on the interest on £100,000 of the mortgage as this was the original cost.

Pennywise

Euphoria1z wrote: »

so you can release equity and not pay tax on that, but still have to pay tax on rental income-minus interest on original purchase value? is that correct?

Yes. But remember, you aren't "releasing equity", you are borrowing more money - that's why you don't pay tax on it - it's nothing but taking out a bigger loan! The only way of "releasing equity" is to sell the property (or a share in it) - and when you do that, you have to pay CGT on the profit.

Euphoria1z

so, say after my property has doubled in value, to 200k , bought for 100k, and i remortgage and borrow 85% of 200k being 170k, and the rent has gone up to say 800 pm, and say interest rate is 6%, so rent is £9600 per yr, interest im paying on 170k@ 6% = £10200 meaning rent is not covering the mortgage so am now not making a rental profit, i would still pay rental income because the orignal amount borrowed/or house valued at point of purchase being 100k@6% =6k, does that mean i can only claim 6k interest relief i.e deduct 6k from rental profit of £10200 (10200-6000=4200) therefore i would have to pay rental income on £4200 even tho im not making a profit on rent?

assuming these figures, have i got it about right? thats my understanding any way

mrkbrrws

The profit should have been £9,600 - £6,000 = £3,600 not £4,200.

But why do you say you aren't making a profit on rent? You have income of £9,600 from a property that it costs you £6,000 in interest for the loan to buy it.

The other £4,200 interest you pay relates to whatever you buy with the £70,000 additional borrowing.

Euphoria1z

ok i think i understand, just another question to clarify

so the max interest i can claim of my rent is the max value of the property at the time or the purchase price? coz if i bought it for 100k, and thats when it went on rent, i can only claim interest on this figure regardelss of how much i borrow additionally? if so, do i claim on the purchase/property value or the actual amount borrowed? i.e even tho the purchase price is 100k, i have a deposit so mortgage is 85K but i can still claim at 100k interest , is that right?

and any interest that i have by withdrawing equoty in the future can then be offset against rent if i buy a new property?

sorry for the questions but as it has to do with tax, i need to make sure.

ta.