Tax relief for private landlords?

guygamps

Question for the forum.

I am thinking of buying a flat (for rental purposes) as follows:

1. Equity release on my existing home (mortgaged only to about 35% of value). is already approved by my bank. This is a cash loan at a great rate which is a bank of england tracker rate. Bank have approved loan on interest only basis, idea is to pay off the capital when the flat is sold.
2. So... use the cash released to buy a flat, and rent it out.
3. Since monthly cost of the loan is so low this provides a nice cash profit per month.

Question is about tax.

4. I am presuming the tax on the rental income will be paid at basic rate (the flat and rental income will be in Mrs Gs name and she is a basic rate tax payer).
4.1 Can I presume that tax is only paid on the profit, i.e. do I get tax relief on the payments back to the bank for the interest only element of the loan?
4.2 Since I use "intelligent finance" bank, I can if I wish "overpay" at any time by any amount, so if I also pay off some of the capital month on month, so reducing the capital amount borrrowed (regardless that initially the loan is interest only), can I also claim back tax relief on that since again I would not be drawing profit.

Principle is sound enough, I am expecting to only pay tax on the income received after interest and some capital is paid back on the flat, I just don't know i the tax laws work that way.

There are two main reasons I want to pay off some of the capital, i) in case house prices fall again so as to avoid negative equity, and ii) to reduce the interest only element of the payment in case of BOE base rate increases, which are slated to be coming over next couple of years. The tax benefit (if there is one) is just icing on the cake.

Thanks

Guy

fengirl_2

In reply to your questions:
4. Yes.
4.1 Yes
4.2 No, only interest paid on the loan is allowable against the letting income.
there is no tax benefit to payng off the capital.

Rolo_Tomasi

Just to confirm that your name will not be on the deeds at all even though you are using funds from (an assumed) joint mortgage. If you are in any way a beneficial owner of the property then half of the rental profit will be taxed on you. Of course you may want to be a joint owner when it comes to sell to take benefit from CGT exemptions but that is for the future.

Only the interest on the mortgage used to purchase the property is an allowable deduction for tax purposes - not any capital repayments. You can deduct other expenses incurred ie agent fees, repairs, safety checks etc which will all help to bring the tax down.

guygamps

Thank you all