Income Tax & The Accidental Landord & the sudden lump sum

happywarmgun

Like many people I became an accidental landlord -Baby came along - needed somewhere bigger - couldn't shift my old flat, let it out and rented a bigger property for my family. Rental income on original property was near the mortgage interest charges so income tax implications quite low.

Now, due to redundancy I'm getting a lump sum, and my mortgage is a fully flexible one. My first instinct was to pay off the mortgage on the original property but then it struck me that I would then get hit for the full income tax on the rental income going forwards (I also have a big payment in lieu of notice so will remain in the 40% bracket for the remainder of this year at least).

I'm trying to work out in my head if this means that I would be better off NOT paying off the mortgage but sticking the lump some elsewhere. Before I sit and stare out the window with my calculator - has anyone faced this situation before? Are there rules of thumb about the best thing to do (is it a no brainer?) or does the equation change depending on assumptions about interest rates etc?

Anyone who has faced this for real - I'd love to know what you did and what your logic was.

Elaine_Wilson

I'd probably pay off the mortgage as it is the simpler course of action but it may not be right for you.

If you reduce the mortgage then you reduce the interest paid. This reduction is no longer reducing the taxable element of the rents coming in so you will pay tax on the equivalent amount of the rent. You can calculate this as you know the rate charged on your mortgage.

Alternatively, you keep the mortgage so the tax on the rents is unchanged. But now you face tax on the interest earned on the money unless you can shelter it in some tax-free wrapper.

So it boils down to how the after tax return on any investment compares with the mortgage interest.

happywarmgun

Yup. That's were I was at in my head - I'm still struggling with the maths though! For simplicity I probably will knock it off the mortgage - just want to make sure I'm not shooting myself in the foot...

Jacka87

As always the tax man wins I think. You can either pay tax on the rental income or tax on the interest you earn in the bank. I think tho that the best option for you involves some boring calculator stuff