Rental income - tax relief on unusual financial costs

ArthurBabbage

Slightly complicated question with regard to calculating my tax position. I took out a loan against my property in 2014, which doesn’t require repayment until the end of the loan term - plus a share of the projected value increase. I’d like to know whether the money I put aside each month, which cumulatively goes toward repaying the loan and the projected value increase, can be counted as a financial expense under the new HMRC rules.

[*]Mortgage interest per month: £310
[*]Rental income per month: £1500
-
[*]Share of the £35,000 loan per month: £365
[*]Projected value increase between 2014 and 2025: £77,500
[*]40% of this increase, split over 96 months: £320
-
[*]Total monthly expenses: £995


At the moment, I can deduct the mortgage interest (although I know that’s gradually changing from 100-75-50-25-0) but I’d like to know whether the other monies can be seen in the same light.

antrobus

ArthurBabbage wrote: »

....
At the moment, I can deduct the mortgage interest (although I know that’s gradually changing from 100-75-50-25-0) but I’d like to know whether the other monies can be seen in the same light.

No, they are capital, not income.

uknick

Mortgage interest is not being removed as a tax deductible item. The rule changes mean it only attracts basic rate tax relief, 20%. But, as you say, there's a transition period built into the new rules to soften the blow for tax payers who fall into tax rates above that.

Dazed_and_confused

Mortgage interest is being removed as a tax deductible item as far as it being an expense is concerned and replaced with a different tax relief.

A few people ultimately won't notice any difference because of the tax reducer they will get to replace the expense deduction but plenty will. We don't know the op's situation but say he was an elderly male married pensioner then the increase in his profit will potentially reduce his Married Couples Allowance. The tax credit he will get instead of the loan interest deduction won't alter that.

Likewise for those who move up a tax bracket or find themselves with income over £100k because of this change. Others will also be affected even if they don't necessarily think so at first glance.

00ec25

ArthurBabbage wrote: »

[*]Mortgage interest per month: £310
[*]Rental income per month: £1500
-
[*]Share of the £35,000 loan per month: £365
[*]Projected value increase between 2014 and 2025: £77,500
[*]40% of this increase, split over 96 months: £320
-
[*]Total monthly expenses: £995

only one of those figures (£310) appears to be an interest charge, all the others appear to be capital repayments of both the original sum borrowed and what appears to be a deferred capital repayment corresponding to some formulaic increase in value of the property

You cannot claim capital repayments. Nothing complicated about that at all unless the £320 per month for 96 months is a combined capital and rolled up interest charge? If it is, then ask for a breakdown.....

ArthurBabbage

Thanks for the replies. Just for clarification, what does a capital repayment mean in tax law? I didn’t borrow the money to spend on property or equipment (for example), but to service financial costs.

As the 40% value increase (shown in projected monthly payments of £320) could constitute an interest payment of some kind, is this not tax deductible?

00ec25

ArthurBabbage wrote: »

Thanks for the replies. Just for clarification, what does a capital repayment mean in tax law? I didn’t borrow the money to spend on property or equipment (for example), but to service financial costs.

As the 40% value increase (shown in projected monthly payments of £320) could constitute an interest payment of some kind, is this not tax deductible?

please explain exactly what the "40% value increase" means.

capital repayment in tax law means what it says. A loan comprises a capital element (the amount borrowed) and an interest charged on that borrowed sum

assuming it is not an interest only loan, then the repayment comprises a capital element (amount borrowed / frequency of repayment) and an interest element (amount borrowed x % interest charge). Only the interest charge is an eligible cost for income tax purposes - assuming of course that the loan qualifies against the income stream in the first place

BoGoF

Not sure what you mean by 'to service financial costs'.....what exactly was the loan for £35000 spent on? And there is no interest on this?

With regards the increase in value normally this would be a capital gains tax issue and perhaps this could be deducted from any future capital gain? Not 100% sure on this.

ArthurBabbage

‘40% value increase’ refers to the percentage of the increase in property price that the loan provider will contractually receive at the end of the term. Therefore if the house goes up in value by £75,000 then they will take 40% of this amount = £30,000. I guess this figure is in lieu of monthly/annual interest payments during the life of the loan term, and that’s why I was asking if the £30,000 could be deducted from my tax bill.

The challenge is that this figure is just a projection of the value increase - and it would also need to be divided monthly (reflecting the amount I put aside into my savings account each month, in order to pay off the total balance in 2025).

BoGoF

So at this stage you havent incurred any costs for this and potentially will not do so so how can you justify a deduction against letting income? Answer is you can't. As I say you may be able to deduct it from future capital gains liability.

ArthurBabbage

OK - thanks.