Reducing tax on property rented out ?

danlondonuk

I would appreciate advice, I own outright a small flat without a mortgage as this was paid off sometime ago, I am planning to rent out the flat but realise that as I dont have any mortgage on it
I will face large Tax costs against the income recieved.
Many have stated to me 'Oh just go and get a buy to let mortgage on it' however if I already own the property and the sole reason is to reduce tax and not buy another property would this be allowed?

I understand that tax relief on interest payments are allowed only on loans taken out to purchase the property, as I own it and would not be purchasing what I already own am I still able to release equity and set the loan interest off against my tax bill from the rent whilst not spending the new loan on property but investing it say in
equities or a high interest account.

Is the HMRC allowance for interest only mortgages allowed if one takes out a new mortgage without using the money to invest in a property? As I dont want to buy any other property at this time what is the best way to reduce the tax liability on the owned flat

CLAPTON

basically yes you can take out a mortgage on the property and offset the interest against tax

however, unless you manage to get a return higher than the mortgage interest rate you will lose money

don't let the tax tail wag the dog

danlondonuk

Clapton, thanks for the advice, appreciated however being somewhat dim can you explain.
If I take out an interest only mortgage the interest that I pay is used to reduce my tax liabilities so I am still left with the initial lump sum borrowed which I could invest in a bond or savings acct, whilst this would still be liable to tax on the interest in the savings acct I would be earning something from the investment after paying the notional tax rate. If I just let the flat and pay the tax on the income without taking out any mortgage I am loosing say
20% or 40% in tax on the rental amount?

Am I correct or confused?

CLAPTON

lets assume you borrow 100,000 at 5%
so the interest is costing 5,000 per annum

you can offset this against your rental income so your tax will be reduced by 20% of 5000 i.e. 1,000

so the loan is costing you 4,000 per annum

so to break even you need to invest 100,000 to make 4,000 per annum after tax i.e. 4% after tax

00ec25

CLAPTON wrote: »

so to break even you need to invest 100,000 to make 4,000 per annum after tax i.e. 4% after tax

no point saving £1000 in tax if you lose £10,000 of capital because the investment has not performed/failed

Also as mentioned on your other thread you will most probably *have* to get a BTL mortgage which will have higher rates on it (and require a larger LTV) making it even harder to find a low risk investment that beats the borrowing cost.

Borrowing money to invest it has always been a risky move becuase of the margin between what it costs you to borrow it and what you can earn from the investment - if the only reason you are doing the investment is to save tax on the rental income then the tax tail is indeed wagging the dog so you'd better be a very good investor