Property tax relief

MFSaver

Hello all, I would appreciate some insight on the following real situation.

I currently own Property A, which is under a mortgage, and Property B, which is fully paid for and is my main residence.

I intend to get a mortgage on Property B in order to release equity and pay off Property A. The reason for this is because Property A's mortgage will be at the end of its fixed period and will be going on a variable rate of 4%. I will like to get a fixed rate in place so that I like the security of knowing how much I need to pay for the next few years, and I expect Property B to have a good enough LTV ratio to attract a better interest rate than 4%. Remortgaging Property A is unlikely as I am unlikely to have a good enough LTV ratio.

I have pretty much decided on the above action. My question concerns property tax relief, since Property A will be let out after its mortgage is paid off.

I know that interest payments can be offset against rental income to determine the actual taxable income.

In the event I proceed with the above action, is it possible to offset the interest payments on Property B's residential mortgage against the rental income on Property A?

Keep in mind that the bank issuing the residential mortgage on Property B will send the released funds to my solicitor, who will then pay off the mortgage on Property A (This will be a condition imposed by the new lender, as stated by the mortgage advisor I spoke to, to ensure that the released equity is used for the reason I gave them).

On another note, if you are in a situation where you declared a loss on rental income, I understand that you can use that loss to offset profits in future years. Is there a time limitation on how long you can use a declared loss in a specific year (for the same property)?

I appreciate any insight as well as links to relevant information.

holly_hobby

Yes it is possible to offset an equity release mge on your main res to either purchase of finance a let residence - BUT and this is vital - there must be a clear audit trail between the 2 transactions.

You have advised that the monies released from your main res will be directly released to your Solicitor, whom will directly furnish the funds to repay the existing mge (BTL?) on the let property - there is your clear audit trail (which it would be beneficial to keep a hard copy of the linked transactions from your Solicitor, for provision to HMRC when/if required re your offsetting of mge interest against your rental income).

You may offset losses against future taxable gains it is automatically carried over by HMRC, here is their link explaining more;- http://www.hmrc.gov.uk/manuals/pimmanual/pim4210.htm, but do seek some accountancy advice with regards to this, and other allowances other than mge interest, that may offset against gross rental income (i.e management fees, agency fees, repairs, travel etc ..etc..).

HMRC submission is via annual self assessment (except if you are PAYE and annual taxable income is below £2,500), or of course you could use an accountants services.

There are many other considerations, and there is an excellent sticky about this (have a search through), you also need to consider (if rental income will be reqd to service the mge raised on your own home) how you will address any terms of unoccupancy of the property.

I have also attached HMRC property rental tool kit if you are a first time landlord may be helpful:- http://www.hmrc.gov.uk/agents/toolkits/property-rental.pdf

Hope this helps get you started (good luck with it all) ....

Holly

MFSaver

Fantastic, thanks for the information, holly hobby. That is what I needed to know.

:beer:

I only plan to let Property A out after paying off its mortgage, but having done some calculations, a few months of non-occupancy will not affect me at all.

Regarding the self-assessment process, if the net rental income exceeds 2,500 pounds but offsetting it with mortgage interest brings it below the 2,500 threshold, do I still have do a self-assessed tax return? I.e. is mortgage interest an allowable expense for tax relief purposes?

In any case, can I choose to do self-assessment regardless of the annual taxable income, in case I have to declare a small profit or a loss? I am fully aware of the deadlines of completing the self-assessed tax return.

holly_hobby

If your taxable rental income is less that £2,500 AND if you are currently PAYE - you may apply to HMRC to have the tax deducted at source i.e by amendment of your PA.

If you are not PAYE, or your taxable rental income exceeds £2500, your submission to HMRC is via annual self assesment/accountants.

Hope this helps

Holly