Is it better to overpay mortgage with rental income than pay tax?

Billy_Sly

Apologies if this has been bought up before but i couldn't find it anywhere.

I am about to rent out a property i own for approx £1300/month. My mortgage is £550/month so after paying this and other costs (e.g. service charge) leaves me with approx £650 each month before tax. I am in the 40% tax bracket meaning that once tax is paid i would be left with £390/month.

My question: Am i best dumping the remaining £650 into overpaying my mortgage instead of paying 40% tax on it? If i do this i will pay my mortgage off several years earlier according to mortgage overpayment calculators and make sure that the money that would be going to the tax man goes towards me.

I appreciate any advice/thoughts etc. and thanks for your help

Jimbo1976

I think you will need to pay tax at 40% on the surplus of rental over mortgage irrespective of whether you overpay it or whether you spend it on anything else. It is just the interest payments which are tax deductable not capital payments.

Also if you pay down the capital the interest payments will fall (giving you less tax relief)

Wh05apk

You can only offset the interest element of the mortgage against tax, so overpaying would have no tax benefit, infact as you will be reducing the balance/interest charged in furture years your tax would increase.

Don't forget you may potentially be able to offset interest on a residential mortgage as well up to the value of the rental property when it first "entered" your rental buisiness.

Billy_Sly

That clears it up and now it's been said seems incredibly obvious! Thanks alot.

Wh05apk

If it's your first time renting/in business, then as a 40% tax payer already it would almost certainly be worth paying an accountant for advice to se what else you can claim for.

holly_hobby

Yep, you pay tax on the actual net profit (after all permitted deductions), no matter what you actually do with the profit.

You would be better placed overpaying on your residential mge, where there are no tax breaks.

As a HRT payer, are you married/civil partnership ? If so, and your partner is a BRT payer (or less), then it would be beneficial to hold the property as tenants in common, with an uneven split of equittible benefit, which essentially means that under HMRC regs you can apportion the profit as a mirror image, obv in favour of the lower tax payer i.e 99/1 split means that £100 profit would be apported £99 partner - £1 you ... so you can see how this may be of benefit to your particular circs.

If this is the case give me a shout and I'll send you the HMRC pdf form for completion (whilst your solicitor will arrange tsf of deeds into a TIC arrangement)

Hope this helps

Holly

PasturesNew

Of course, if you drop the rent to £550/month, then it becomes tax free!
:P