Tax - Renting and offset mortgages

h555 · 28 May 2008 at 10:40PM

Hi,
Does anyone have knowledge of taxation on retal income?
I am in the higher rate tax band, and wondering whether to switch to an offset mortgage?
I know I can offset the interest payments on my mortgage, and if I switch to offset, the interest payments will reduce (but I wont receive any interest on my savings). Will this put me in a better or worse position?
Also, I am only renting my property , as I had to move for a job - so am also payiong out rent myself...assume I cannot offset this?
Ta,
H

happywarmgun · 28 May 2008 at 11:34PM

Please - someone give an answer to this! Have similar queries myself (I have a long standing empty flat I am considering renting out).

Let's say the apartment I own in on a virgin one account - can I just figure out what how much rent I am going to get, figure out the difference between the current monthly interest payments and what the balance would have to be for the rent not to cover the monthly mortgage payments - transfer that amount out of the virgin one account to a high interest savings account and this years ISAs for me and the Mrs- then pay no tax on the rental income (as it would exactly cover the interest payments) - Or would doing that be either dodgy or not as wise as it seems at first thought after a few gins?

tbs624 · 28 May 2008 at 11:44PM

Just to clarify H555- are you saying that you have a mortgaged property that you are currently letting out to a Tenant, you have a good level of savings investment, and that you yourself are renting another property in which to live?

AFAIAA, the interest rates on offset mortgages tend not to be amongst the best, and what you'd gain in tax efficiency by using an offset mortgage, you'd lose by effectively reducing the payments that you can set against the rental income on the investment property. You'd need to talk to a broker who specialises in BTL offset mortgages and go through your specific finances. Is your current mortgage a BTL interest only one? (If you previously lived there yourself and had a residential mortgage you should have sought the mortgagor's consent to let the property out)

And no, the rent that you pay out for somewhere for you to live is irrelevant as far as HMRC is concerned - it has nothing to do with the income from your investment property and cannot be claimed as an expense.

brit1234 · 28 May 2008 at 11:48PM

h555 wrote: »

Hi,
Does anyone have knowledge of taxation on retal income?
I am in the higher rate tax band, and wondering whether to switch to an offset mortgage?
I know I can offset the interest payments on my mortgage, and if I switch to offset, the interest payments will reduce (but I wont receive any interest on my savings). Will this put me in a better or worse position?
Also, I am only renting my property , as I had to move for a job - so am also payiong out rent myself...assume I cannot offset this?
Ta,
H

Brave person jumping on the buy to let ship as it has been torpedoed and taking water on fast.:D

happywarmgun · 29 May 2008 at 7:58AM

I don't think he's jumping on the buy to let ship. As I read it, same as me, s/he has a home with an offset mortgage - needs to move, wants to rent where s/he is moving and at the same time wants to rent out thier current home and is wondering how you calculate the tax liability on an offset mortgage.

Anyone help?

tbs624 · 29 May 2008 at 10:55AM

happywarmgun wrote: »

I don't think he's jumping on the buy to let ship. As I read it, same as me, s/he has a home with an offset mortgage - needs to move, wants to rent where s/he is moving and at the same time wants to rent out thier current home and is wondering how you calculate the tax liability on an offset mortgage.

I read it the same way as you, except the OP has said

h555 wrote: »

...... and wondering whether to switch to an offset mortgage?

Could just have joined the STRs, unless s/he's in in area that's struggling at the mo, or his/her new job is temporary.

As you're already on an offset, HWG, why not just ring HMRC helpline and check with them?

h555 · 29 May 2008 at 12:50PM

thanks guys
yes tbs624 - thats right - I have a mortgaged property that I am currently letting out to a Tenant, have a reasonable level of savings, and am myself renting another property in a different area to live in.
Not jumping on any ship - I didnt have the choice!...need to rent my mortgaged property in order to pay rent myself

My current mortgage is residential - with permission to let. That's at 6.25%, and the new offset one I am considering is 5.94%, with £1,500 set up fees - maybe there's not much in it - you either lose out through interest payments, or tax payments:(

Icey77 · 29 May 2008 at 1:32PM

h555 wrote: »

Hi,
Does anyone have knowledge of taxation on retal income?
I am in the higher rate tax band, and wondering whether to switch to an offset mortgage?
I know I can offset the interest payments on my mortgage, and if I switch to offset, the interest payments will reduce (but I wont receive any interest on my savings). Will this put me in a better or worse position?
Also, I am only renting my property , as I had to move for a job - so am also payiong out rent myself...assume I cannot offset this?
Ta,
H

Hi H,

You have to pay tax on the total of your rental income less any allowable costs. Allowable costs are things like the mortgage interest (but not the capital repayment), repairs, LA fees, leasehold management company charges etc etc.

You can not claim the rent you have to pay yourself - you are choosing to move that is not HMRC's problem!

Hope that helps, if you have any further specific questions put 'em on here!

Icey x

happywarmgun · 29 May 2008 at 2:45PM

Icey77 wrote: »

Hi H,
You have to pay tax on the total of your rental income less any allowable costs. Allowable costs are things like the mortgage interest (but not the capital repayment),
Icey x

That was my understanding too. So - is my logic sound?:

I'm a higher rate taxpayer
I currently have a very small offset mortgage (virgin one) on a property I've failed to sell (about 30k remaining - property worth maybe 140k in current climate - paid 165k for it six years ago).

I have a virgin facility of about 100k on the property. The interest repayments are just a few hunderd a month but it's sitting empty.

I would get around 750 a month rent.

Without corrective action on my part I would be taxed at 40% on the difference between my interest payments and the rent. A few extra hundred to Mr Brown a month which I would resent!

However, if I withdraw all my facility (i.e. 70k) bang that in a high interest account - I will be paying no tax (as the interest payments will be about the same as the rental income) but will be earning the return on the 70k.

I guess the question is - is that the smart thing to do? Or would I still be better off chipping away at the remaining capital with the rental income - albeit with the government taking a 40p from every pound I chip away at?

Anyone able to do the maths quickly?!?

h555 · 29 May 2008 at 3:39PM

But wouldn't you have to pay 40% on the savings income if you did that?...so effectively leaving you in the same position??

happywarmgun · 29 May 2008 at 5:31PM

Well I'd funel 6800 of it into this years ISAs for me and the Mrs (or whatever 2x maximum cash is).... but after that you're right - my interest income would also be taxed - never underestimate my own ability to overlook the obvious!

Tax - Renting and offset mortgages

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