Help I'm Confused

Fab10

So 8 years ago I purchased a house via buy to let mortgage and has since been let by a agency.
I pay my taxes every year on the property income etc.

I am thinking of making some lump sum payments to the mortgage to reduce the interest ie looking to pay approx £25k.

However will this have any tax implications as I am also working?

Secondly I may be looking to sell the property in a couple of years and again thinking I may be taxed as since purchase has only been let out so maybe I should live in the property to show it has been used for personal residence but not sure how long I would need to live in it?

So should I still make the lump sum to reduce mortgage drastically and save approx £9k in interest or should I save the money to pay towards any new property?

Any help is greatly appreciated.

G_M

1) yes. It will reduce the amount you can offset against rental income for tax purposes


2) As it's not your main residence you will be liable for CGT.

More here.


3) do the maths!

kinger101

Living in a property for a short period solely for the purpose of claiming residence relief isn't likely to work, particularly if the property isn't suitable to your circumstances. HMRC don't just consider the length of your tenure, but the quality.

bowlhead99

Shazay10 wrote: »

I am thinking of making some lump sum payments to the mortgage to reduce the interest ie looking to pay approx £25k.

Secondly I may be looking to sell the property in a couple of years

So should I still make the lump sum to reduce mortgage drastically and save approx £9k in interest

To keep the numbers easy, let's say your mortgage rate is 4% a year.

You are thinking of selling the house in a couple of years. So, if you decide to pay down your BTL mortgage an extra £25k, you will save the 4% interest cost on the £25k that you no longer owe (about a thousand pounds a year), for each of those two years until you sell it.

So ignoring the tax effect, you'd be saving about £2k in interest over the two years. Not £9k of interest, because the interest that you were previously paying on the extra £25k of borrowing was only about a thousand pounds a year and this effect only lasts until you've sold the property in a couple of years.

However in terms of your income tax on your property letting business, your interest expense has gone down by £1000 a year so you can no longer claim 20% tax relief on that business expense. So, although you'll save £1000 interest in costs you'll lose £200 a year in tax relief. In other words you only benefit by 800 net each year, not the full £1000. So after two years that's £1600 not £2000. That's even further away from making a £9k saving as you were hoping.

That's not to say it's a bad thing to pay down the mortgage and save some interest, particularly if the cash was only going to be sitting in a bank account earning a couple of percent, but you do need to look at the costs properly.

Fab10

Yes you have a valid point. If I was to live in the house I would be living in it properly ie residence mortgage, bills, taxes, etc and would be living in for a decent amount of time. Nothing wrong with the house apart from a fair bit of work needing done only because the tenants haven't really give the house any tlc. Otherwise more than big enough and certainly in a very good location.

Fab10

Many thanks for such a detailed response bowlhead. You made it easy to understand and simplified it with a great example.
Apologies if I have confused by saying I would save £9k in interest. This was calculated as: loan amount being £70k outstanding at 2.5% apr with a time period of 12 years remaining. So if I paid a lump sum of £25k plus paid the entire mortgage within 2.5 years then it said I would save approx £9k of interest. Hope this explains my figure of £9k

kinger101

Shazay10 wrote: »

Yes you have a valid point. If I was to live in the house I would be living in it properly ie residence mortgage, bills, taxes, etc and would be living in for a decent amount of time. Nothing wrong with the house apart from a fair bit of work needing done only because the tenants haven't really give the house any tlc. Otherwise more than big enough and certainly in a very good location.

From their perspective, they want to know there is some expectation of permanence when you move in. That's not to say you should be expected to live there forever. More that you regarded it as being a stable home for the immediate future. So be careful how you phase things if you're asked. Saying you fixed it up because you didn't want to live in something rundown would be good. Saying you fixed it up ready for a resale wouldn't.