BTL MORTGAGE TO REDUCE TAX or NOT?

danlondonuk

(ALL ADVICE GREATLY APPRECIATED)
I am about to rent out a small flat which was my only and main residence. I have since moved into my partners place, As my flat is now mortgage free would it be wise applying for a BTL mortgage
on the flat as a way to reduce my tax bill which will be high as there is no debt on the flat. I have no plans at this present time to buy any other property, would HMRC espect me to spend any money raised on the property to be used for a new purchase or could I just keep it in an incestment vehicle bond etc with the new mortgage amount borrowed on the rented out flat ?

Am I correct in thinking that if I rented the flat out for say £800pcm
and took a mortgage of £85,000 the following calculations would apply or have I got the tax payments amount wrong, I am on PAYE 20% tax band at present.

Examples
Rent Received £800x12 = £9600 per annum
Mortgage 85,000 @ 6%= £ 5100 Mortgage Repayments per annum

£9600 rent - £5100 Mortage repayments = £ 4500 TAX OWED ?

Also am I able to deduct first painting,decoration, or double glazing
in preparation for my first rental ?

Are all mortagge application,valuation,survey and solicitors fees tax deductable ?

Would it be better to just let the flat without a mortgage my calculations would be say
£800x12 rent receievd = £9600 tax at 20% would be £1920 or as this may just push me into the 40% bracket = £ 3840 tax owed

My basic PAYE salary is approx £32000.

ALL advice and explaining to a rather mathematical dim person who is new to renting out their only home.

CLAPTON

well firstly
given your example if you had a mortgage the tax would be 20% of 4,500 i.e. 900
without the mortgage the tax would be 20% of 9,600 i.e. 1,920

the 40% tax rate starts at 42,475 (i.e. at 7475 + 35,000 = 42,475)

so why pay 5,100 in interest to save tax of (1,920-900) i.e. 1,020
unless your 85,000 can get a return after tax of 4,080 i.e. a return of 4.8%

in any event you will have some allowable deduction from the rent which will reduce the tax.

dazza.mk

CLAPTON wrote: »

so why pay 5,100 in interest

I think the OP has quoted the total mortgage repayment (given the figures) rather than just the interest - OP its only the interest element of the mortage repayment that you can deduct on a tax return

de1amo

9600 rent less mortgage interest = profit less tax at 20/22pc--i am not sure the rate!?

noodle

Tax is only charged on your profits, so to reduce the tax you have to reduce your profits.. in this case by incurring interest.. so you make yourself worse off, and then the taxman gives you 20-40% of your loss back.. but you've still lost.

The only way this works is if you can put the £85,000 to use and make more money than you're paying in interest.. and bear in mind that you'll be taxed on what you make too.. so it's a tough and risky strategy. In answer to your question, however, it's none of HMRC's business what you do with the money.

Also, in case you don't realise, if your rental income pushes you into the higher rate tax bracket then you'll only pay 40% tax on the portion over that threshold - so if the last £1,000 (say) of your rental income is over the threshold you'll only pay 40% on that £1,000, and you'll still only pay 20% on the rest of the rental income.

Nosht

Why would you want another mortgage after being mortgage free?
It will not help your tax position.

N.

CLAPTON

dazza.mk wrote: »

I think the OP has quoted the total mortgage repayment (given the figures) rather than just the interest - OP its only the interest element of the mortage repayment that you can deduct on a tax return

85,000 at 6% interest rate = 5,100

de1amo

im interested in this post because i am thinking of doing exactly the same deal but on 95k. i have sounded out an İFA and he thinks he can get me between 4 and 5pc. i will take the money abroad and put it in a high interest account bearing 9,3pc less 15pc tax. the risk is the exchange rate but i am not confident in the uk economy!

CLAPTON

de1amo wrote: »

im interested in this post because i am thinking of doing exactly the same deal but on 95k. i have sounded out an İFA and he thinks he can get me between 4 and 5pc. i will take the money abroad and put it in a high interest account bearing 9,3pc less 15pc tax. the risk is the exchange rate but i am not confident in the uk economy!

and you are confident in an economy yielding 9.3% ... ?

noodle

de1amo wrote: »

im interested in this post because i am thinking of doing exactly the same deal but on 95k. i have sounded out an İFA and he thinks he can get me between 4 and 5pc. i will take the money abroad and put it in a high interest account bearing 9,3pc less 15pc tax. the risk is the exchange rate but i am not confident in the uk economy!

But you're confident in the economy of somewhere offering you this 9.3% interest? You've heard of Iceland, I presume?

Of course, anyone is free to borrow a chunk of money because they think that they can get an investment return which outweighs the cost of borrowing.. and all the better if that borrowing cost becomes tax deductible.. but it's a lot of money to put on risk, and I'd argue that anyone rich enough to take that risk is probably too rich to be chasing that level of tax saving.

The question to ask yourself is 'would I take on this borrowing, to make this investment, if I wasn't saving a bit of tax on my property income?'. If the answer is no, then don't do it.

danlondonuk

(MANY THANKS TO ALL THOSE WHO HAVE REPLIED)
Nosht- I was thinking of taking out a mortgage after being mortgage free to reduce my TAX, why give the taxman most of my profit on a small flat and my ony property- however rushing to buy a new property at the moment I don't think is the best option, property in the future won't bethe money maker it has been in the past I feel simply because of the state of the economy and banking system etc.
Surley if I earn £9600 in rent and don't have any mortage owing on the property I am going to LOOSE alot of the income in TAX.

Also am I able to deduct first painting,decoration, or double glazing
in preparation for my first rental ? Or can this only be claimed after a year or so renting?

Are all mortagge application,valuation,survey and solicitors fees tax deductable ?