Pay off the mortgage or pay the tax?

RoadeRunner · 6 March 2006 at 2:17PM

Hi all you clever people out there can someone give me some advice ?
We have just paid off the mortgage on our main property but we also have a buy to let property which has a mortgage of £36,000 outstanding and is let to my son & girlfriend at a below market rent. The monthly repayment is about £145 per month and the rental income £335.00. At the present time the income is offset by the mortgage payment for tax purposes and tax is paid on £190 per month less expenses. If we pay off the mortgage we will have to pay more tax but I don't know if this is a good thing or a bad thing. Should I be looking at the amount of overall interest I will pay if I keep the mortgage going or the short term tax efficiency ! I think I have just answered the question myself but would like some confirmation.

Thanks in anticipation.

lisyloo · 6 March 2006 at 2:24PM

Well I think you've kinda answered your own question which is "do the sums".

However my gut feeling is that you'll definitely be better off not paying off the mortgage, simply because you lose 20% of the money you make.

An ISA would be the best place for nay extra money you have.

Thefunkygibbons · 6 March 2006 at 3:07PM

A further tax thought might be, when is the best time to gift the property to your son as part of an inheritance minimisation arrangment

That will depend on the value of your estate and your age

hazelize_uk · 15 March 2006 at 11:02PM

Hi Funky Gibbon, ive been reading all your posts and wondered if i could pick your wonderful brain!

We have been trying to do the same thing for a few years now - we have an offset type mortgage and rounded the payments up by £60ish a couple of years ago but from December we have been paying anything left over in the month straight to the mortgage. We were putting it into an offset account but the temptation is there to dip into so we now knock it straight off! £43,898 left and hoping to be mortgage free in at least 3 years 13 years early! I now pay £700 on top of the £400 which was already overpaying.

I do have a dilemma tho and dont really know the place to put it!

I have recently been involved with sorting out paperwork etc, for grandparents, who have been forced to sell their houses in order to pay for their long term medical care.

It has upset the whole family thinking how hard they worked to buy their houses to lose them in this way and have nothing to leave behind which is what they would have wanted.

I've been thinking about transferring ownership of our house into the names of my children once they turn 18 to prevent the same thing happening, does anyone know if this is a) possible or b) legal or c) have any better ideas??

I was interested in your comment about 'gifting' property and wondered if you had any further advice that might help.

exil · 15 March 2006 at 11:15PM

It's certainly legal

Possible glitches

1. IHT if you die within 7 yrs of the gift.

2. CGT - but there is an annual allowance for this, so you may not have to pay anything.

2.Once you gift or sell your house, IT IS NOT YOURS! If your offspring get into financial bother, you end up homeless.

3.It really has to be a gift, not just a "paper" transfer. That is, you would be unlikely to get away with it if you live there rent-free.

I have to say I fail to understand the wish to leave large amounts of cash or property to offspring. Nowadays with people living until their 80s or 90s more often than not, your kids won't inherit until they are in their 60s - long after they really need the money (which is when they are buying a house and raising a family).
In fact, they'll inherit just in time to give it away to the state to pay for their own care!

Your plan ensures yr kids get the assets when of an age when they will be of use to them - but it's in the form of a house that you are living in! In other words, they won't be able to "realise" the asset until you pass on.

What you could do is - gift the house, move out and buy a smaller one. Kids could sell house or keep it as "buy to let".

hazelize_uk · 16 March 2006 at 12:24AM

That sounds quite marvellous actually! once we retire i might just sell it give them both some dosh to set them up - buy a camper van and go on a mad travelling spree around the world! until its all gone!

Hopefully if I can get my savings sorted after paying the mortgage i can help them with uni or college fees etc

ooh im back to the drawing board now for more thinking!

Thanks for the advice though every bit helps!

hazelize_uk · 16 March 2006 at 12:31AM

presumably if we paid them rent that would be taxable under schedule A so what about if we gifted a % of the property?? I dont really mind if the money was left to grandchildren if my children by then didnt need it - I would just much rather it didnt go to social services as the prices they change per week you could be on a luxury cruise for the rest of your days and get much better standard of care!

Pay off the mortgage or pay the tax?

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