Tax implication question

saveandspend

Hi, hoping someone may be able to help me.

I have a small flat which I am getting close (still a couple of years away, but close-ish) to paying off the mortgage on.

Instead of selling it and using the money to put towards a bigger place, I was thinking of renting out the flat, and using the money to help fund the mortgage on a bigger place.

My question is around the tax implications of this. Could I deduct the capital mortgage repayments of the new place from the income received on the rent from the old flat?

If not, is there any way around this? e.g. If I instead remortgaged the old flat and used the money to pay off much more of the new place so I only had a small mortgage on the new place. Then presumably as I am receiving income and paying a mortgage on the same old flat, I could deduce the capital mortgage repayments as costs before being taxed?

Hope I've explained that ok. Any advice appreciated, thanks.

kingstreet

saveandspend wrote: »

Could I deduct the capital mortgage repayments of the new place from the income received on the rent from the old flat?

You can't offset the capital payments against the rental income but you can deduct the interest element of the mortgage payment. However, you need to be able to demonstrate a clear connection between the funds you borrow and the letting of the property.

It would probably be sensible to remortgage the existing property onto a BTL to fund the deposit on the house you want to live in. You need to remember lenders use a factor of around 1.2 to 1.25 x by which the rent must exceed the interest-only monthly payment.

For example, The Mortgage Works want rent to exceed interest payments by 25% on a mortgage of upto 75% of the value of the property, based on an interest rate of 4.99%.

So if you have a property worth £100k, you could get a mortgage of upto 75% if the rental income is £390 per month as it exceeds the £312 per month interest at 4.99% by more than 25%. The £312 could then be offset against the rental income for tax purposes, as can letting charges, maintenance, repairs etc.

saveandspend

Thanks for the info kingstreet - that pretty much answers my question. You're right, I meant the interest part of the mortgage, not the capital part - slip of the tongue.