tax help

runny

Hi all,
Recently come into £15k inheritance and wondering best way to invest. I have a buy to let property on a variable rate of 5.79% against a debt of £95k over 20yrs. The income from this property almost matches mortgage interest payments - I paid around £600 tax last year on the income. I am a 40% tax payer - is it worth paying the 15k against the mortgage or will the additional tax paid on rental income offset any reduction in mortgage interest gained when factored with what I could earn in a savings account. My head cannot cope with all the variables here. Help appreciated.
Cheers

Debt_Free_Chick

runny wrote: »

is it worth paying the 15k against the mortgage or will the additional tax paid on rental income offset any reduction in mortgage interest gained when factored with what I could earn in a savings account. My head cannot cope with all the variables here. Help appreciated.
Cheers

You can not get interest on a savings account to match the interest you pay on the mortgage so, using that measure only, paying off the mortgage is better. But bear in mind that once you pay off the mortgage, you can not get hold of that £15k without taking out a new/another mortgage.

You need to weigh up all the pros & cons, not just the interest.

Money_Grabber13579

While this is not totally tax related, I'd look at re-mortgaging because that rate seems very high!

runny

thanks - yeah rate is high - but have looked at remortgaging and current buy to lets are charging £££'s in arrangements.

Not sure figures are right - but if my part paying off the mortgage reduces interest charges which means i am paying 40% tax on more of the income - this soon outweighs the saving from mortgage interest? This see-saw of benefit is what is throwing me - or am I making this over complicated as per the first reply??

Money_Grabber13579

I'm not quite sure what you're saying, but I don't think anyone other than business' can set off debt interest against tax. Therefore, no matter what your interest is on the mortgage, I don't think it is possible to reduce your tax liability. (This may be different for buy to let properties as the debt interest may be classed as an allowable expense on the income - I'm not sure)

runny

debt interest is an allowable expense - ie you can offset mortgage interest against tax - hence the Q... Am I shooting myself in foot reducing mortgage interest, increasing my income tax....

appreciate your reply - not straightforward is it?

Money_Grabber13579

Ok, I should have known that! Well on 15k, at say 6% (this is a very rough calculation, the actual answer will be different!) you'd be paying £900 a year. By paying this off, you expenses will be 900 lower,however your relief will only be 40% of that. So no I don't see that you will be shooting yourself in the foot. But maybe someone else see's otherwise?