But-to-let vs Residential

jamesromoneysaving

Hi,


I'm going to be in a position shortly, where I will own 2 houses, with one to be rented out and the other to be my residential home. However, I will only need one mortgage, on either property, to cover my debts.


I was led to believe that in any situation where you are renting out a second property, you should maximise the mortgage there, because if the interest payments are more than or equal to the income, then no tax is required to be paid on the rental income?
However, I was also recently told that any rental income below £12,000 per year, does not require any tax to be paid anyway.


So, with a rental income of less than £12,000 per year, should I be looking at a residential mortgage (2-3%) on my residential home, as opposed to a buy-to-let mortgage (3.5-4.5%) on the rented property...?
If I don't need to pay tax on the income from the rental property, then does it make more sense to have that as owned outright, and have a "normal" mortgage on my residential house, given the percentage differences in rates between the 2 types of mortgages?


Many thanks in advance for any pointers, it is much appreciated.


Thanks

amnblog

You should be consulting an Accountant and ignoring anyone who says you don't pay income tax on rent under xxxxx.

nidO

jamesromoneysaving wrote: »

However, I was also recently told that any rental income below £12,000 per year, does not require any tax to be paid anyway.

Whoever told you this is wrong

jamesromoneysaving wrote: »

I was led to believe that in any situation where you are renting out a second property, you should maximise the mortgage there, because if the interest payments are more than or equal to the income, then no tax is required to be paid on the rental income?

This is true, but also simplistic - Being able to avoid tax on the income because of the interest being paid is only worthwhile if the tax you're avoiding having to pay is more than the difference in cost between the two mortgages.
If the BTL mortgage costs you £100 a month more in interest than the residential mortgage would but you're only able to avoid paying £90 a month in tax thanks to the total interest cost, obviously there's no benefit.

Typhoon2000

You could take a mortgage secured on the residential property at the lower rate up to the value of the rented property on the date it was introduced into the bussiness, and still off set the interest against tax on rental income.
It matters not if the loan to start the bussiness is secured or not, or secured on a different property or valuable.