Any issues with paying off part of a BTL mortgage?

tryfan

Hi all
Not sure if this is the right place but a quick question. I currently have a btl mortgage which is starting to cost me money with tax etc. I have a few pence in the bank which would reduce the mortgage I pay and bring it back to break even/profit. If I do throw money at the mortgage, will I be losing on the tax front if I sell in the next 12 months? Are there any other considerations I need to consider?

Cheers

holly_hobby

Any reduction on debt will obviously have an impact on any cgt liability on disposal of the property.

Any reduction in debt will obviously reduce the interest charged, which you are offsetting against your gross taxable income from the property - naturally increasing your net taxable gain = more tax payable on the income

I may just leave this as they are if were me ... but you are you ..

Speak to your accountant ... he will shuffle the figs & help guide you to the most tax efficient way of handling this ...

Hope this helps

Holly

Thrugelmir

If you are paying tax then the rental is profitable.

So why do you believe that you are losing money?

tryfan

Thanks both
thats mor or less what I was thinking. Thrugelmir, the bank changed the interest rate on my BTL just over a year ago meaning I now pay a lot more mortgage then before, this has destroyed my profits sadly. I am in no way a business person, I got divorced kept the house, moved away and been renting it out as I had a tennant before I had a buyer!

This might be a bit simplistic, but I want to compensate for the rate rise by reducing the mortgage. I did have an accountant last year, they reduced my tax bill from £1400 to £200 for the first year, then it went back up to £1600 for the following year, with no appreciable changes in income. When I queeried they just fobbed me off, so I left them.

Sometimes wish I had just sold it in the first place....

Thanks again

Tryfan

antrobus

holly_hobby wrote: »

Any reduction on debt will obviously have an impact on any cgt liability on disposal of the property.

Actually no. It will have no effect whatsoever on the CGT liability.

antrobus

tryfan wrote: »

Hi all
Not sure if this is the right place but a quick question. I currently have a btl mortgage which is starting to cost me money with tax etc. I have a few pence in the bank which would reduce the mortgage I pay and bring it back to break even/profit. If I do throw money at the mortgage, will I be losing on the tax front if I sell in the next 12 months? Are there any other considerations I need to consider?

Cheers

Simple answer: if you have (say) £10,000 in the bank earning 2.0% (less tax) and a £100,000 BTL mortgage on which you're paying 5.00% (less tax), then if you used the £10,000 to pay off a chunk of the mortgage you'd be better off to the tune of 3.00% of £10,000 (less tax).

There's no point in spending money just to reduce your tax bill.

kingstreet

How about remortgaging to a new lender for a better rate? As antrobus says, there's no point paying money you don't need, just to cut your tax bill.

holly_hobby

antrobus wrote: »

Actually no. It will have no effect whatsoever on the CGT liability.

Ah of course ... orig pch price is used in calc ... what WAS I thinking !!

Holly

Thrugelmir

tryfan wrote: »

I did have an accountant last year, they reduced my tax bill from £1400 to £200 for the first year, then it went back up to £1600 for the following year, with no appreciable changes in income. When I queeried they just fobbed me off, so I left them.

Don't blame the accountant. The tax liability will be derived on the net profit made. As the capital balance is reduced then the effect is for taxable profit to rise, as the interest paid reduces.

The recent BTL fad was driven by capital gain. To repay capital debt out of a rental stream after tax requires a gross yield of least 10%.

Gorgeous_George

What is your BTL mortgage rate? There may be savings available that can be better than repaying the mortgage.

For example, assuming your BTL mortgage rate is 5%. If you are a 20% taxpayer you need to find a savings account/investment that will pay 4% after tax.

Have you got another mortgage with a lower rate. You might be able to pay the BTL mortgage down and use the lower rate mortgage to offset against tax. You'd need a good accountant to confirm.

GG

tryfan

Thanks all, some useful help there. I am on the lowest rate BTL I can find amongst the high street lenders anyway.