Interest allowable against tax with Offset mortgage

mountaindreams

I have an offset mortgage on the property I currently live in. I have savings and cash ISA offsetting against the mortgage so currently pay interest on quite a small amount and have a pretty good rate (0.62% above BoE base rate.

I am likely to relocate soon so am looking at renting my house out (I will be renting elsewhere for now). I plan to ask for consent to let and keep my current mortgage. I have asked my bank and these will charge me an extra 0.5% of the outstanding mortgage balance (without taking into account any offsetting) every 6 months.

I will move the cash ISA to a seperate account and get interest on it instead of offsetting.


I spoke to the bank and I think I should be offered the consent to let OK. And with the extra 1% on the interest per year this is still better than any BTL mortgage I could get at the moment.

Do you know if the interest charged on this offset account will be allowable against the income I get from renting? As this will make a difference to what I decide to do with my savings - whether I pay a large chunk off the outstanding mortgage, or leave it offsetting or move them to another account and earn interest.

CLAPTON

yes in general you can offset interest on a mortgage up to the value of the property when first let.

do the maths through... the tax saved is only 20% (or 40% if a higher rate payer) leaving you to pay the other 80 or 60% so unless your ISA/saving a/c gives you saving interest in excess then you will loose on the deal

mountaindreams

Clapton. Thanks for your reply. I think you mean offsetting against any gains in the value of the property with regards to capital gains when I sell?

I was thinking about the rental income from the property. Obviously the rental income that I receive will be taxable. I want to know if the interest that I am charged on my offset mortgage/bank account can be subtracted from the rental income so that I pay less tax on the rental income.

jamesd

Yes, the interest on a loan up to a maximum of the purchase price (or value when transferred into the letting business in your case) is deductible from rental income. The mortgage doesn't need to be on the property that is being let.

I don't know how the interest reduction for offsetting is handled. Logically it's a loan from you to your BTL business and the full amount of that loan should be deductible because the business isn't placing any offset money with you. But this is only logical analysis, not tax law and you should check with an accountant or tax person who is more familiar with this issue.

CLAPTON

mountaindreams wrote: »

Clapton. Thanks for your reply. I think you mean offsetting against any gains in the value of the property with regards to capital gains when I sell?

I was thinking about the rental income from the property. Obviously the rental income that I receive will be taxable. I want to know if the interest that I am charged on my offset mortgage/bank account can be subtracted from the rental income so that I pay less tax on the rental income.

I meant what I said
that you can offset the interest (against your rental income) on your mortgage up to the value of the property when first let.

the mortgage has nothing to do with cgt

fightingjen

You can only offset the interest that you pay. So if you are paying less interest due to an offset then that's all you'll be able to deduct from the rental income.