Taxable Income on Rental Property

dubl_d8

I remember someone saying that the taxable income on the rented property is basically the rental income less interest on the property loan (I understand there are a few other things that can be offset).

My question is, if more money is borrowed against the rented property, then the difference between the income and interest is less, therefore less tax should be paid.

Am I right so far?

So if this extra money was borrowed against the rented property, what would be the best thing to do with it - Another property? Savings? Reducing morgage on joint owned dwelling? Or something else?

I am not sure if I have this right, I try to understand the Inland Revenue information, but it is a little confusing.

Can someone please advise.

jeeves_2

dubl_d8 wrote:

I remember someone saying that the taxable income on the rented property is basically the rental income less interest on the property loan (I understand there are a few other things that can be offset).

My question is, if more money is borrowed against the rented property, then the difference between the income and interest is less, therefore less tax should be paid.

Am I right so far?

So if this extra money was borrowed against the rented property, what would be the best thing to do with it - Another property? Savings? Reducing morgage on joint owned dwelling? Or something else?

I am not sure if I have this right, I try to understand the Inland Revenue information, but it is a little confusing.

Can someone please advise.

Hiya...im not a tax expert but il try to help.
the interest u pay on the mortgage can be offset, just the interest element not the whole amount you pay. You can also offset repairs that you do or any furniture etc you buy for the proporty.
If you borrow more against your mortgage again you can offest the extra interest element but only if you are using the money to either improve the propertry or re-investing in another investment. Treat it like a business, if you're borrowing to re-invest in the business then its fine, but if you're borrowing to pay off personal loans or increase personal investment then you cant.

hope this helps

Jeeves

WHA

There has been some good threads about this subject on http://www.accountingweb.co.uk/cgi-bin/item.cgi?id=125023&d=448&h=668&f=452 a few months ago.

The situation is more complicated than you think.

It always used to be the case that the money raised had to be used for the property in question, but it seems that the rules changed a few years ago and some of the "top people" in the accountancy world didn't realise the implications.

Basically, you can remortgage your rented property to raise funds for other purposes, but there are rules as the amounts which are complicated and are based on your "capital account" on your balance sheet.

This in effect limits the amount of interest you can claim for. You would need some proper advice to get it right, but your thoughts are reasonable and you may find there is some mileage in doing as you suggest.

Here is a link to the guidance on the Inland Revenue website:-

http://www.hmrc.gov.uk/manuals/bimmanual/BIM45700.htm

MarkyMarkD

The example quoted in the IR guidance doesn't cover the situation as described by the OP. What it says is that if you already own a property with say an £80k mortgage, and THEN decide to let it out and at that point remortgage for say £125k, you can offset the interest on the £125k rather than just the original £80k.

That is because at the point of remortgaging, you are transferring both the property and the remortgage loan from you as an individual to your letting business.

If you already have the letting business with an £80k loan, you can't legitimately remortgage for £125k and take the £45k out of the business - if you do, the £45k isn't tax allowable.

If you retained it in the business, and used it as the deposit on your next rental property, then it would be fully allowable along with any interest on a new mortgage on the next property.

dubl_d8

I read through the IR example and it appears to take into consideration the market value of the property at the time in which the property changed from an individual to a business.

“the interest on the mortgage loan is allowable in full because it is funding the transfer of the property to the business at its open market value…”

I find it confusing because it goes on to say “…at the time the business started”.

Does this mean then, that it is possible to draw on the capital from the business, up to its market value when the business started?

That is how I understood it.

MarkyMarkD

I think that your understanding is correct. But you can't take out unrealised gains occurring after the start of the letting business over and above the initial capital value, and offset the interest on that additional borrowing against the rental income.

I suppose the benefit, for most people, is that if they buy a property with an 85% BTL loan, they can then withdraw the other 15% once the price has risen sufficiently for them to remortgage, and offset the whole amount against tax at that point.

But most people will do that to buy a further property for letting, in which case it would be allowable in any case.