BTL advice please

kate2954

Wonder if anyone can help me please! I have a bTL mortgage of 115000 (interest only)on a property worth 17000. I also have a residential mortgage of 80000( repayment) on a property worth 16000. I was planning on overpaying on the bTl mortgage so the tenants would be effectively paying off the mortgage over the next 20 years. However a friend has indicicated to me that this would not be a good idea for capital gains tax.? So would the best course of action be to overpay the residential mortgage in my quest to be mortgage free or even sell now ? I lived at the BTL property for 8 years and have have been renting it out for the previous 5 years. I admit I am a reluctant landlord without much know how , swayed into the BTl business by a lack of sale and need to move ! Thanks all responses welcome xx

getmore4less

your friend needs lessons in tax.
Ask them to explain the tax implictions

How you pay the mortgage has no impac on CGT.

It may impact the income tax you pay.

Initialy you need to look at interest rates yields nd realistic sale values to decide what action to take.

dimbo61

Have you got a good emergency fund to cover repairs,empty periods when you get no rent, or letting agents fees ?
You get tax relief on the interest part of your mortgage on the BTL and your accountant should tell you that ( you do have an accountant?)
If you have spare money then overpay your residential mortgage first

kate2954

I think he meant if I reduced the capital of the mortgage then would have to pay more cgt when eventually sell especialy if the tenants paid all the mortgage off for me ? Think I have enough savings to cver loss of rent repairs etc though dont have accountant !

GuidoT

The paying off of the mortgage capital has no bearing on the CGT calculation. It will impact on your income tax payable though as your profit will increase. As GM4L says.

Simply put, CGT is paid on the differential between your purchase and eventual sale (disposal) price, less any appropriate reliefs and allowances.

From an income tax perspective it is generally better to pay off your home mortgage rather than a BTL mortgage.

kedj

As above, the mortgage wont effect the CGT due. The CGT is based on the price you paid for the house and the price that you sell it for:-
Profit = Selling Price - Buying Price
CGT would be due on the profit. You can deduct fees and there may be other allowances. Have a look on hmrc website :-http://www.hmrc.gov.uk/cgt/intro/working-basics.htm

If the rental income is not covering your mortgage interest, then you cannot use this as a loss to reduce your CGT liability.

If the rental income is greater than the mortgage interest, then the excess is subject to income tax. So if you pay some money off your BTL, you may pay extra income tax on the rental. If you pay off your own residential mortage then obviously this wouldnt effect the tax due on the rental income.

Sorry: left computer for a while and have duplicated some of above reply

kate2954

Thanks - was only thinking of overpaying BTl as mortgage interest so much higher than residential and never decreases due to IO and find that hard to deal with - psychologically ! At the moment the interest payment and rental income are about the same . So if I kept it on Interest only keeping the same interest payment each month but reduced the capital with my own money would I be liable for more income tax or would that still be offset against interest payment as would be using my own money to pay off capital ?

dimbo61

Reducing or getting rid of the mortgage on your home is better as you get NO TAX RELIEF on that.
once you have paid off your mortgage then consider the BTL

kate2954

Thanks though if I overpaid on my BLT mortgage and paid off capital my interest payments would still be the same so would I still be liably for more interest tax ? Dimbo - even though I get tax relief on the BLT wouldnt I also pay more tax on sale therefore making it priority to pay off BLT first ? Sorry - struggling to ge my head around it ! x

Typhoon2000

kate2954 wrote: »

Thanks though if I overpaid on my BLT mortgage and paid off capital my interest payments would still be the same so would I still be liably for more interest tax ? Dimbo - even though I get tax relief on the BLT wouldnt I also pay more tax on sale therefore making it priority to pay off BLT first ? Sorry - struggling to ge my head around it ! x

Overpaying your interest only BLT will reduce the amount you owe and hence the interest charged (though your monthly payment remain the same every month more of it goes toward reducing the capital owed and less to pay the interest charged). Profit is rental income - interest charged-other expenses. So if you overpay your BLT, your profit increases and hence tax due is also increased. So if both interest rates are similar then it is better to put your overpayment toward your residential mortgage.

Capital Gain Tax when you sell BLT is calculated from the Price sold and Price you purchased (less expenses). It has nothing to do with how much, if any, mortgage you have remaining on the property.

kate2954

Thanks Typhoon - think Im getting it ! My BTL is 4.7 and residental only 1.6 % if that is significent enough to not pay off residential mortgage first ?