Overpaying BTL, is it efficient for tax purposes

Kalashnikov · 7 January 2018 at 1:37AM

Hi Happy new year

I have a question about overpayments. We are fortunate to be able to pay 10% every year on our residential property. And I can completely understand the benefits. Etc

lender A Property A (residential) - 2.54 - 5y fixed ending - 01/04/2021 - ERC fixed outstanding 148k current LTV 40%

Below are two of my BTL mortgages, which one should we overpay with a lump some approx 13-15k

Lender B - Poperty B (freehold) - 3.99 (interest only) 5y fixed ending 30/09/2020 - ERC FIXED 213k current LTV 60%

Lender C - Property C (leasehold) - 2.50 (repayment) -5y fixed ending 31/03/2022 - ERC tapered 130k current LTV 60%

Both BTLs are held in unequal shares with my spouse barring most the income and tax burden being a lower rate tax payer.

My question is which mortgage could do with this cash injection to further reduce are tax exposure given mortgage interest will be tapered over the next 4 years.

Please give me your calculations and thoughts on this. Thanks in anticipation

anselld · 7 January 2018 at 3:32PM

Mortgage interest relief is not tapered for lower rate tax payers.

Pay down the highest interest rate first (3.99).

Pennywise · 7 January 2018 at 3:44PM

anselld wrote: »

Mortgage interest relief is not tapered for lower rate tax payers.

No, but the method of calculation may affect a "basic rate" taxpayer, i.e. by pushing them into higher rate.

Kalashnikov · 7 January 2018 at 5:22PM

anselld wrote: »

Mortgage interest relief is not tapered for lower rate tax payers.

Pay down the highest interest rate first (3.99).

The reduction in relief is being phased in between now and 2020 and will be replaced by a 20pc tax credit. From this year landlords can offset only 75pc of their mortgage interest against their profits. This falls to 50pc next year, 25pc in 2019 and zero in 2020.

anselld · 7 January 2018 at 5:30PM

Kalashnikov wrote: »

The reduction in relief is being phased in between now and 2020 and will be replaced by a 20pc tax credit. From this year landlords can offset only 75pc of their mortgage interest against their profits. This falls to 50pc next year, 25pc in 2019 and zero in 2020.

Yes, I know. However, for a lower rate tax payer (subject to remaining lower rate in the new scheme) there is no impact since they are only getting 20% tax relief now anyway.

00ec25 · 7 January 2018 at 6:05PM

Kalashnikov wrote: »

The reduction in relief is being phased in between now and 2020 and will be replaced by a 20pc tax credit. From this year landlords can offset only 75pc of their mortgage interest against their profits. This falls to 50pc next year, 25pc in 2019 and zero in 2020.

agreed, but irrelevant if you remain a basic rate (20%) taxpayer and the changes do not push you into the higher rate bracket because of the way the calculation works

read: https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies

as a HR taxpayer surely you can do the basic maths yourself? Without knowing what your ERC is, any sums we do may be misleading.

Kalashnikov · 7 January 2018 at 6:24PM

00ec25 wrote: »

agreed, but irrelevant if you remain a basic rate (20%) taxpayer and the changes do not push you into the higher rate bracket because of the way the calculation works

read: https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies

as a HR taxpayer surely you can do the basic maths yourself? Without knowing what your ERC is, any sums we do may be misleading.

please assume 10% every year is without penalty. max ill pay is 10%

Overpaying BTL, is it efficient for tax purposes

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