Why is it more Tax efficient to have a B2L on an Interest only basis

Sfield

I know that it's more tax efficient to put a B2L mortgage on an interest only basis but I don't fully understand why.

Please could someone help me and explain why it is.

Andy_L

A landlord can class the interest as a business expense but not repayment of capital. With a repayment mortgage, as the years go by your , same, monthly repayment is made up of more capital and less interest so they can offset less of the cost against tax

CLAPTON

like many rules of thumb ; it is incorrect

Pennywise

It's another selling "trick", just like the salesmen who tell you it's better to lease a car or copier because you get more tax relief.

With interest only BTL, the "trick" always seemed to be using an ISA as the repayment vehicle - the IFA's usually factored in the tax free status of the ISA, together with the usual "projected returns" on it, to illustrate how you'd be far better off over the term of the mortgage using interest only instead of repayment.

In both cases, you do indeed get more "tax relief", because you've paid more, i.e. a lease is usually more expensive than buying outright or with a loan\HP, so you pay more, and thus get more tax relief, but even after tax relief, you've still paid more!

Same with interest only mortgages - of course you've got more tax relief because you've been paying interest on the full amount for 25 years whereas with a repayment mortgage, you'd have been paying less interest as each year passed. As you've paid more interest, then of course, you get more tax relief, but again, the net after-tax payments are more in proportion. You've just got to hope that the ISA they sold you comes good (and don't crash in the same way that endowments did by the time you come to want to cash in!)

taxing

Generally, and in the 'boom' the whole thesis of BTL was buy using 100% interest only loan; rent the property so it washes it's face and pays the mortgage and running expenses with maybe some leftover - all the while, the capital value is appreciating....

You then sell at considerably more than the original 'cost' which is still your capital gains tax base cost even though you 100% financed the purchase from borrowings. You pay back the borrowings, and pay the capiital gains tax (if any) - here, of course, you will before sale, split ownership in to joint names with spouse in order to get two annual exemptions....but even after capital gains tax any profit is purely that and you haven't really paid out anything.

A no brainer...until the bubble burst....

Regards.