Tax treatment of mge interest: owner now letting-out

[Gazzadfc]

I am aware of the tax benifits on the interest on a buy to let mortgage but does the same apply if I have a residential mortgage on my house which I am now going to rent out?

[Tax Accountant]

I am aware of the tax benefits on the interest on a buy to let mortgage but does the same apply if I have a residential mortgage on my house which I am now going to rent out?

Yes.

In fact, you could even top up the existing mortgage upto the value of the house when you started letting it, and still claim the whole interest as an expense against your rental income from the house.

Any additional mortgage advance secured on the house could be used in any way you prefer, eg, to reduce or clear your mortgage on your new home or indeed towards buying a new house for you to live in.

Ramnik

[Gazzadfc]

Thanks for that, with regards to the mortgage is things like critical illness/life assurance or income protection are they liable as well? would think they are not but you have to ask!! Is it advisable to find and use an accountant who I presume will be able to offer all this advice or is it advisable to "go it alone".

Thanks again.

[Tax Accountant]

Thanks for that, with regards to the mortgage is things like critical illness/life assurance or income protection are they liable as well? would think they are not but you have to ask!! Is it advisable to find and use an accountant who I presume will be able to offer all this advice or is it advisable to "go it alone".

Thanks again.

Only interest on the mortgage is eligible.

If life insurance is a condition of the mortgage, then the insurance premiums may be allowable. However, in that case, any payment received on the policy will also be an income subject to tax.

For what little an accountant may cost you, it may be worthwhile using one. But this really depends on how confident you are in dealing with the taxman yourself.

Ramnik

[Gazzadfc]

Just one more question regarding the tax situation on the mortage interest.

My mortgage is residential and for the last several months I have been making overpayments, when I let my property I presume it would be better for me to stop making overpayments and this will slightly affect the relief I can get on the interest, would this be correct? My mortgage is repayment and was taken out in March this year and as we all know the 1st few years on paying your monthly payments goes mainly on the interest and not the capital.

[Tax Accountant]

Just one more question regarding the tax situation on the mortage interest.

My mortgage is residential and for the last several months I have been making overpayments, when I let my property I presume it would be better for me to stop making overpayments and this will slightly affect the relief I can get on the interest, would this be correct? My mortgage is repayment and was taken out in March this year and as we all know the 1st few years on paying your monthly payments goes mainly on the interest and not the capital.

How much of your monthly repayment is capital and how much interest is a question of fact.

Any overpayments will of course reduce your outstanding balance and is not an allowable deduction. You should check whether your overpayments during any year are taken into account in calculation of your interest charge. A lower mortgage balance will in most cases mean a lower charge for interest. This will mean a smaller deduction against the rents and therefore a higher tax charge.

However, if you are a basic rate taxpayer, you will pay additional 22 pence tax for every £1 interest saved. Therefore, although you will pay more tax, you will save even more in interest charge.

To conclude, it is a personal choice and also cashflow issue whether you wish to pay off any mortgage quicker than normal.

Ramnik

[Gazzadfc]

Many thanks for all your advice Ramnik.

[Tax Accountant]

Many thanks for all your advice Ramnik.
You are welcome.

Ramnik

[Gazzadfc]

Ramnik, just a simple question for you.

If your monthly rent income (after letting agents fees) does not cover your mortgage (say a shortfall of maybe £20) do you still have to pay tax on this? No profit involved, like I say the rent wont cover the actual mortgage monthly payments.

Thanks again.

[Tax Accountant]

Ramnik, just a simple question for you.

If your monthly rent income (after letting agents fees) does not cover your mortgage (say a shortfall of maybe £20) do you still have to pay tax on this? No profit involved, like I say the rent wont cover the actual mortgage monthly payments.

Thanks again.

If your actual mortgage payment is interest only, you will be making a loss. If so, there is no tax to pay and the loss is available to carry forward to next year.

EXAMPLE:

1000 Rent
-100 Less Agent's fees

900 Balance
-950 Less Interest included in repayment instalment

???? There may be other deductible expenses to claim here.

-50 LOSS TO CARRY FORWARD
THERE IS NO TAX PAYABLE ON A LOSS.

Does this answer your question?

Ramnik

[Gazzadfc]

Thanks but the mortgage is repayment and not capital.

[Tax Accountant]

Thanks but the mortgage is repayment and not capital.

You said earlier in one of your replies that:

My mortgage is repayment and was taken out in March this year and as we all know the 1st few years on paying your monthly payments goes mainly on the interest and not the capital.

This means that at least a small part of your monthly repayment is capital which reduces the outstanding balance. The rest of the monthly repayment is interest. It is only the interest amount included in your monthly instalment which is allowed as an expense to reduce your rental profit.

You are taxed only on any of your rental income remaining after taking off agents fees, interest charge on your mortgage, buildings insurance, gas and electricity safety certificates, repairs bills etc.

If your rental income is less than loan interest and other allowable expenses, you will make a loss and there is no tax to pay on any loss.

Ramnik