200K to invest so I can offset rental interest on my tax return

rscott300

Basically I have an offset mortgage 200K which my savings is reaching the same amount as the mortgage. I rent out two properties and need to be able to offset the mortgage interest on my tax return (otherwise I pay tax). Obviously for this to be worthwhile the interest i accrue has to be higher than the mortgage because as soon as I take the money out of the offset account I will have to pay the bank interest on the mortgage...

Hope this make sense and someone can help...

Rich

MarkyMarkD

Your question isn't exactly clear.

But if you don't actually pay any mortgage interest because the mortgage is fully offset by savings, you can't claim any mortgage interest against your rental income.

IMHO you would do better to forget about offsetting in your circumstances as the supposed tax savings of offsetting don't apply - you could get the same tax savings by claiming the mortgage interest against your rental income.

And then you could get a cheaper non-offset mortgage.

All of the above depends on the respective amounts, and I'm assuming that your two properties cost you more than the £200k. If not, it gets more complex.

But say that your offset mortgage rate is 6%. Interest on £200k is £12,000 pa. But you're offsetting savings against that, and effectively earning £12,000 on the savings. Net income - nothing.

If instead you had a non-offset mortgage at a rate of (say) 5.5%. Interest on £200k is £11,000. And the £11,000 can be offset against rental income, so only costs you 60% of that = £6,600.

Then you could actually earn interest on the £200k, at say 6.3% (A&L Direct Saver). You'd earn £12,600, but pay tax on that at 40% = £7,560.

If you have a spouse paying tax at less than 40% (particularly good if it's 0%) then you can increase the net interest on the savings.

But equally well, if you had a spouse paying tax at less than 40%, your spouse ought to own the rental properties.

All in all, you are £960 better off by not offsetting.



Hard to give proper comments without the full figures, but I hope that's helpful for starters.

rscott300

Thanks for your reply. I understand your thinking but in your calculation although I will be £960 better off I will still need to pay an extra £3440 to the bank (the difference in interest payment £11,000 - £7,560).

What if I opened an offshore bank account moved my 200K there earned interest est 4.5% which would not accrue tax and then have the benefits of being able to offset the full £11,000 against the rental income ?

Any comments ?

MarkyMarkD

Whilst you'll have to pay an extra £3,440 to the bank (or actually a net £3,440 to the bank(s) involved), you'll save £4,400 in tax. So overall you'll be better off.

Offshore doesn't save you any tax. It's still taxable in the UK. All you get is a timing benefit.

jamesd

There is no offshore bank account which will not accrue interest. You're liable for it wherever the savings are unless it's in an ISA or one of the other UK tax exempt wrappers.

Take a look at NS&I savings that are tax free and you can start to switch the money to them. Their calculator can help you to track what's still available to you.

If you're not already doing it you can add investing with the stocks and shares portion of your ISA allowance.

You can also invest for growth outside the ISA and use your CGT allowance.