Taxing Times Oct 11

I have a buy to let property that I bought about 8 years ago for £250,000. In the early years I never used to make a profit on the rental income as this used to be well covered by the mortgage interest. The current mortgage is around £100,000. With the low interest rates the amount of interest I pay is low and now I have a profit which is taxable. Is there any way I can shift some of the mortgage on my personal property to the buy to let to minimise tax? The property is valued at £300,000.

Answer:

Mortgage interest paid on a buy to let mortgage is deductible from the rental income received which reduces your profit and therefore the amount of tax you pay. If you have a mortgage on your domestic property then you are correct in thinking that there may be an opportunity to save tax by reorganising your borrowings.

However, there is a cap on the maximum amount that you could claim. Because you paid £250,000 for the property then this is the maximum amount upon which you could claim mortgage interest relief against income. Whilst in theory you can re-mortgage the property in excess of the £250,000 you would only be able to claim tax relief on that proportion of the mortgage interest relating to the first £250,000 of the mortgage.

You do not say how much your domestic mortgage is but if it were say £100,000 as well then there would be sense in re-mortgaging the buy to let property to £200,000 and using the money to re-pay your domestic mortgage. The full amount of interest on the new buy to let property would then be fully deductible. It is important that you do re-mortgage the property and not just notionally allocate your domestic mortgage to the buy to let property.

Whilst this strategy should save tax you also need to consider the rates of interest that you are paying now with that of a new mortgage, and, any early repayment penalties that may arise to ensure that there is an overall financial saving. You will also need to find a bank that is lending money at present!

Any reader interested in discussing this topic further can telephone Graham Jennings on 01344 875000 or email graham.jennings@kirkrice.co.uk

Answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.