When is Mortgage Interest a tax allowable expense? Reply

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There are ways that you can claim tax relief for your mortgage interest.

Qualifying Loan Interest Relief

Often when you start a business you will need to borrow money personally to lend to your new company or buy shares.

You might borrow by increasing your mortgage.

You may be entitled to claim tax relief for interest paid on a loan or alternative finance arrangement used to buy:

  • shares in, or to fund, a ‘close’ company (contact your HM Revenue & Customs (HMRC) office if you are not sure if the company is ‘close’)
  • an interest in, or to fund, a partnership
  • plant or machinery for your work (but make sure you do not claim this interest twice, you will do if you have already deducted it as a business expense)

If you receive a low-interest or interest free loan from your employer for one of the above purposes you may be able to claim relief for any benefit taxable on you.

This is called ‘Qualifying loan interest relief’, HMRC have a helpsheet which gives further details HS340

Property Investors/Buy to Let

At the moment property investors can also offset mortgage relief against their profits but the rules are changing.

2017/18 75% of the interest can be claimed in full and 25% will get relief at 20%

2018/19 50% of the interest can be claimed in full and 50% will get relief at 20%

2019/20 25% of the interest can be claimed in full and 75% will get relief at 20%

2020/21 100% will get only 20% relief

For a 20% tax payer that’s fine but for higher rate taxpayer its a disaster that will lead to them paying a lot more tax

These rules will not apply to Companies, Companies will continue to claim full relief.

How much can you borrow?

In summary if you re-mortgage above the original market value and you own the property personally and take out the cash you will not be able to claim relief from interest on the part above the original market value

If however you borrow to invest in another property that is ok.

steve@bicknells.net

Buy to Let interest relief tax saving ideas 3

To Let

Restriction of Mortgage Interest Tax Relief

The governments’ plan is to restrict individuals on claiming mortgage interest as a cost against their property investment income, for individuals it will work as follows

2017/18 75% of the interest can be claimed in full and 25% will get relief at 20%

2018/19 50% of the interest can be claimed in full and 50% will get relief at 20%

2019/20 25% of the interest can be claimed in full and 75% will get relief at 20%

2020/21 100% will get only 20% relief

For a 20% tax payer that’s fine but for higher rate taxpayer its a disaster that will lead to them paying a lot more tax

These rules will not apply to Companies, Companies will continue to claim full relief.

What could a Property Investor do to reduce the impact of these changes?

Here are a few ideas….

  1. Pension Contributions – Pension Contributions currently receive tax relief at your rate of tax – 20% to 45% – so if you are a 40% tax payer you would need pay half the value of your 20% restricted interest into your pension to mitigate the extra tax
  2. Change of Use – would your Buy to Let be able to be converted to a Furnished Holiday Let? or anther type of commercial property on which the restriction won’t apply
  3. Increasing the Rent – Could you charge more to cover the extra tax?
  4. Spouse Income Tax Elections – If the property is jointly held HMRC assume a 50/50 split of the income but you can change that using Form 17 this might be useful if one of you is a basic rate taxpayer and the other a higher rate taxpayer
  5. Tax Deductible Expenses – Many landlords overlook expenses at the moment but they could become a lot more important, for example, use of your home, motor expenses, computers, travel and subsistence, phone costs etc

What do you plan to do when the changes take effect?

steve@bicknells.net

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