Buy to let and home mortgage question

holly_hobby

real1314 wrote: »

In essence I don't think you need to do anything, just claim for £40k worth of your residential mortgage against tax.

Only if the 40k being claimed was directly released from the property (and thereby incurring deductable interest), AND if wholly and directly invested into the business (ie BTL property in this case, either to fund the pch, re the 40k mentioned, or upgrading, etc), BUT there must be a clear audit trail for HMRC to verify.

If she used 40k of held savings to fund the initial deposit, and which was not borrowed via a loan or via any mge equity release exercise on another property held by her) , then obviously there are no resulting interest payments being accured to be offset against rental income for tax - so the 40k deposit irrelevant for HMRC and tax purposes.

As far as I can ascertain, the OP wants to release capital from the BTL ( due to its tax benefits), to reduce her residential mge balance (which has no tax benefits).

Of course how much free equity she can release (as capital withdrawal), will be restricted by the max BTL LTV she can source whilst the property remains self sufficient rental wise (ie rent must equal at least 125% of mge interest), so even if she were able to obtain a 100% or even 100%+ BTL mge , the capital released will still be restricted by the rental income ratio and headroom requirements of the lender.

Additionally, just to be clear for any confused readers, no aspect of a residential mge interest or loan (which has no audit connection to/did not fund the business), may be offset against any commercial loan and/or tax return of the business or indvidual(s).

Hope this helps

Holly

PS - have dug this out for ref, hope it helps clarify if you don't refer to your accounant/TA - http://www.hmrc.gov.uk/manuals/pimmanual/pim2105.htm

Cruixer

Thanks again folks, I don't actually have an account or TA (I should maybe get one!?!), in fact I have only recently declared earnings to the taxman as I only recently started to make a profit - this in itself was probably a mistake but I am probably one of many 'accidental landlords' who are having to get to grips with the system. My ultimate goal is to pay off my home mortgage and if the market was more buoyant I would probably just sell the property and use the equity to pay off a lump sum from my home but I don't think that selling would be wise any time soon so I need to try and arrange a good longer term setup for the BTL mortgage and tax return.

Although I have not been very wise in my dealings with the rental property (including making additional payments to the capital a few years ago before realising the tax implications) I have at least been wise enough in negotiating my home mortgage with a good interest rate and no penalties for overpayment but without reducing the term. This means that I can pay extra whenever I can but I can still drop back to a payment based on the remaining 21 years of the mortgage term if I need to. Its the overpayment allowance on the home mortgage, and the realisation that I would now be paying more tax the more I pay off the capital on the BTL that prompted this question, so it sounds like I need to try and find a lender that will do a re-mortgage for me. If the original purchase price is still valid as a value (bought in 2004) then my LTV is about 60% so it might be worth trying to get that up to 80%, if this fails my bank have said that I can switch to interest only on payment of a fee but this might be worth it in the longer term.

holly_hobby

Hi C,

Well you obv really thought about this and done a bit of homework, and seem to understand how to manage the 2 mges for max financial benefits - so well done you !! x

IO is a typical BTL arrangement, really due to the tax advantages of offsetting the mge interest ... there is however a school of thought that the higher the mge, the less the actual net profit in your pocket on a monthly basis, and of course the lower the os mge, the more protection against neg equity in a falling market ..... but I digress...

Yes, if you want to minimise your BTL mge repayments, and offset the max possible amount of interest - stop capital repayments and go completely the IO route any fees associated with the change over, either with your current lender or via a remortgage exercise, are also tax deductable, as it is a direct operational cost of managing (the finance) of the business.

As discussed now at length , you may fully offset mge interest on borrowings upto 100k, anything above this isn't a prob, other than you'll have to absorb the mge interest.

You may also offset (against gross rental income), all associated letting and management costs inc your landlords blds insurance (please ensure you have this !), essential repairs and maintenance, accountant/TA professional fees, cost of utility safety checks and certs, etc, etc .... if you dont engage a tax practitioner, and are unsure if something is a permitted deduction or not, HMRC will be pleased to give you a guide, or have a search on their website (I've already provided a link for you) .

Hope this helps ... do pop back if you need any more help or want to bounce something off us !

H x

Cruixer

Thanks again holly, yes I have landlord insurance and I think I have included everything that is an 'allowable expense'. Just need to sort out the mortgage now.

Thanks for all the help.

Thrugelmir

Cruixer wrote: »

In general does it make financial sense to keep the mortgage on the rental high (and using the money saved to pay off the home mortgage)? I am presuming it does due to the tax liability involved when the interest and costs are less than income but am I missing anything here?

If you are not paying tax then you are unlikely to be making a profit. At least from the rental income anyway.

Often gets forgotten that BTL is a business. Ideally you need to making money in the good times to build up reserves for the bad ones.

Cruixer

Thrugelmir wrote: »

If you are not paying tax then you are unlikely to be making a profit. At least from the rental income anyway.

Often gets forgotten that BTL is a business. Ideally you need to making money in the good times to build up reserves for the bad ones.

I know what you are saying, and this would be 100% true if I didn't have a home mortgage, but I think for me the 'business' is everything I earn/spend, and this includes my home mortgage, and if I direct funds to the capital of my home mortgage my liability for tax doesnt change, whereas if I direct money towards paying the capital on my BTL mortgage my tax liability increases.

holly_hobby

Yep, so you must always keep an eye on the rental market in your area, to ensure that you review your rental band and return, and that you aren't under priced for your specification, location and target audience.

Of course not offsetting permitted costs actually incurred in the management of your let, for the sake of appearing to make a larger profit, benefits absolutley no one least of all you (the tax payer). Unless of course you are a professional landlord, and are able to utilise your portfolio books as a salary/for affordability purposes, so will want your net income to appear bouyant for max borrowing purposes.

Let your tax adviser correctly guide you as to whats best for your financial situation and tax position - but your current plan makes absolute sense to me from a proficient tax planning point of view.

(NB - as I said in an earlier post, just be careful if you keep releasing equity as time goes by, and as and when/if values increase, in that you may be exposed to neg equity if the market suddenly suffers another fallout ..... but you sound as if you're sensible and think things throug, so I'm sure you'll already be mindful of this.

Hope this helps

H xx

real1314

holly_hobby wrote: »

Hi C,

As discussed now at length , you may fully offset mge interest on borrowings upto 100k, anything above this isn't a prob, other than you'll have to absorb the mge interest.

Holly,

I actually find your posts rather difficult to follow, but this line seems pretty clear.

What I'm confused about is why you feel that to achieve a position where the OP can claim for interest on £100k, they need to have any sort of re-mortgage.

Which tax rules prevent them from withdrawing the £40k of equity capital held in the property, and replacing this with a loan, which in this case already exists and is secured on a different property?

The link you used doesn't prevent this approach, and doesn't even mention it.

You aid:-

"Only if the 40k being claimed was directly released from the property (and thereby incurring deductable interest), AND if wholly and directly invested into the business (ie BTL property in this case, either to fund the pch, re the 40k mentioned, or upgrading, etc), BUT there must be a clear audit trail for HMRC to verify."

I'm having real trouble understanding the bit in blue - i just don't understand what you mean by this, or in fact any of the rest of it.

What's reasonably clear to me is that the OP had ownership of a £100k property, with a £60k loan against it.
At the commencement of rental operation, they therefore invested £40k into the business (the equity). That this was in the form of property makes no difference to it being in the form of cash.
Releasing the £40k in the form of cash is no different to any other form of release.

Are you an accountant by any chance? :cool:

holly_hobby

I've tried to decifer what I think you mean, of which I think the crux is ....

That you are inferring, as the OP currently has 40k of free equity in her BTL unit, instead of physically withdrawing the said 40k equity out of the BTL itself (via a further advance or remortgage), for tax purposes, she should in lieu of this withdrawal, just simply offset 40k of her own current residential mge (sourced to purchase her private home), against the rental income as a permitted deduction.

Is this correct ?

I apologise if I've completely mis-understood what you're suggesing, if so, could you explain and expand upon what you mean ?

Many thanks

Holly

real1314

holly_hobby wrote: »

I've tried to decifer what I think you mean, of which I think the crux is ....

That you are inferring, as the OP currently has 40k of free equity in her BTL unit, instead of physically withdrawing the said 40k equity out of the BTL itself (via a further advance or remortgage), for tax purposes, she should in lieu of this withdrawal, just simply offset 40k of her own current residential mge (sourced to purchase her private home), against the rental income as a permitted deduction.

Is this correct ?

I apologise if I've completely mis-understood what you're suggesing, if so, could you explain and expand upon what you mean ?

Many thanks

Holly

Yep, that's it.

If OP had just their own home, and raised £100k to buy a BTL, securing £60k on the BTL with a BTL mortgage and £40k on the residential using a standard residential mortgage, this would be fine, so why not by just moving the equity? :cool: