How to Pay Off Your Residential Mortgage and Claim Interest Relief

Here is an outline a tax-efficient strategy for property investors with a mortgage on their main residence.

Now, doesn’t that sound like a great idea – getting tax relief on the mortgage interest that you pay on your main residence?

Well, you will be pleased to hear that it is possible by following a simple (and relatively unknown) tax relief and some creative financial planning.

The Basics
As most property investors are aware, it is not possible to claim interest relief on your main residence. This is because your main residence does not form part of the property business.
Therefore, because no rental income is received from your main residence, (exception being the rent-a-room-relief), you cannot claim interest relief against your income.
However, you will also be aware that you can claim interest relief on properties that form part of your property business i.e. your buy-to-let portfolio. In such instances you can offset your mortgage interest on your let properties against any rental income received.

Introducing BIM45700
BIM 45700 was first introduced by us back in October 2004. In an article, we identified how this little known strategy gave landlords the opportunity to release equity from their investment properties and offset the interest regardless of what the equity release was used for.
The only restriction is that the equity release cannot be greater than the market value of the property when it is brought into the letting business. If the property had been originally bought for letting, this amount would be the purchase cost of the property.

So How Do We Get Tax Relief on Our Main Residence?
Well there are two ways to achieve this:
Remortgaging existing buy-to-let property/portfolio
Those of you who have or are growing a buy-to-let portfolio are likely to have equity in the property. The example below shows how/when this equity can be released to give you a tax benefit.

Example
John buys a rental property for £200,000. He provides a £40,000 deposit and borrows £160,000. 5 years later the property has increased to £250,000. This means that he has £90,000 equity in the property.
He decides to remortgage the property to a value of £200,000 thus releasing £40,000 of equity from the property. He uses the £40,000 equity release to reduce the mortgage on his main residence by £40,000 and still claims interest relief on this equity release.

Now you will be asking how is this possible?
Well, don’t forget the property was brought into the lettings business when it was purchased for £200,000. The additional amount of equity released has not taken the borrowing over £200,000, so the entire interest amount charged can still be offset against the rental income.
So, if say, for example he is paying £200 a month interest on the £40,000 then he will be able to now offset this interest against his rental income.

Result:
Reduced debt on the main residence
Borrowing moved to buy-to let property upon which interest relief can be claimed against the rental income

Now, this is just an example of a single property. Imagine if you have 2, 3, 4 properties or more and have the ability to withdraw equity as in the example shown above?

By using this same strategy on a number of properties, you could shift the entire debt from your main residence on to your buy-to-let property portfolio and claim interest relief on the entire amount!

Moving Equity from Previous Residence
Another useful tax trick is to remortgage a previous main residence. Again this strategy is best illustrated by an example.

Example
Lisa and John buy a property for £100,000 (£20,000 deposit and £80,000 mortgage). They live in the property for five years and then decide to buy another property. Instead of selling their existing residence they decide to get onto the buy-to-let ladder and let the property out.
The cost of the new property is £200,000, and at the time of letting, their previous residence is worth £150,000.

They increase their debt on the previous residence from £80,000 to £150,000 i.e. they release £70,000 of equity. They then use this equity release to reduce their mortgage on their main residence by £70,000.

Once again, because the additional amount of equity released has not taken the borrowing over £150,000, (the price when it was brought into the lettings business), the entire interest amount charged can still be offset against the rental income. If the interest charged on this amount was £250 per month then this is a significant saving every month.

Once again, with this little trick we have:
Reduced debt on the main residence
Moved borrowing to buy-to let property upon which interest relief can be claimed against the rental income

Conclusion
As you can see, sometimes with a little bit of creativity you can bring significant tax savings! It is possible to get even more creative with this tax break but we’ll leave these strategies for another time.

Article courtesy of Arthur Weller & Amer Siddiq
Arthur Weller and Amer Siddiq are contributors to Property Tax Portal.

April Tax Tips

To see this months tax tips and news click here

Business tax changes taking effect this week

• All businesses can write off 100% of the first £50,000 of investment in plant and machinery each year against their taxable profits under the new Annual Investment Allowance. This can have a significant impact on Child Tax Credit claims and many people can benefit from caeful tax planning.

• Other capital allowances are being reduced. After the first year, firms can now write off 20pc of the cost of new investment in plant and machinery against their taxable profits, down from 25pc. Industrial, agricultural buildings and hotels begin to lose their 4pc annual allowance against the cost of construction. It falls to 3pc this year and will be phased out completely in 2011. A new 10pc rate for integral fixtures and fittings is also being introduced.

• Empty property relief is reformed. At present unlet industrial properties are exempt from business rates and the tax only becomes payable on office and retail space after three months and then at only half the normal rate. From April 6 this year, full business rates will be due on empty shops and offices, and on industrial space after six months.

• Self-employed people earning up to £30,000 now only need to send HM Revenue & Customs (HMRC) their turnover, expenses and net income following the doubling of the turnover threshold. But accountants said they still have to keep records of what is spent in case of enquiry. HMRC has also removed a disincentive to file early. From April 6, it will have 12 months to launch an investigation from the date the business accounts are filed rather than 12 months from the filing deadline of January 31 each year.

Tax Tip of The Week - Workplace schemes to save tax

The tip today concerns businesses that employ staff. Remember that includes yourself if you are employed by your company. We are looking at ways in which the business tax bill can be reduced by creating tax-efficient (and acceptable to the taxman) workplace schemes.

Such arrangements often take the form of a switch to benefits and salary sacrifice to save income tax and national insurance. Although the list is not exhaustive, we are very pretty sure that there is at least something that suits you as an employer or as an employee.

Making assets available for employee's private use
IT equipment: That’s certainly a very big opportunity. It basically means that you should buy your computer equipment through the company (instead of buying them privately) for there are considerable advantages doing so:

The business can buy IT equipment worth up to £2,500 and loan it to employees with absolutely no tax consequences for the latter. The business will get tax relief for the cost of the equipment over a number of years and also claim the VAT on the purchase. Let me say that the rules are quite complicated and if you don’t do it right, you will not achieve the above.

Other assets: When a business gives second-hand assets to be used privately by employees, although employees will be assessed on the perk, it is still advantageous as the tax on the benefit is much lower than normal income tax rates. Classic examples are computers, mobile phones, furnishings, DVD players etc. The company can also reclaim the cost of the assets and the VAT if the asset has been used for business before loaned to the employee (although it will have to pay back some of that VAT, based on some complex calculations). Once again, rules are quite complicated.

Travelling: where the employee works at different temporary sites, provided conditions are met (one of them is that the contract is not entirely based at a certain location), the employee’s traveling is tax-free if reimbursed by the employer. Construction and engineering employees often qualify for this one. We dare say that this is one of the rare situations in tax law where an employee is treated more favourably than a self-employed person. Evidence of expense is needed to persuade the taxman.

Subsistence: there is a limit up to which reimbursements to employees who are away from home on business and have to spend the night away from their home are tax-free. The limit is higher for overseas stay.

Parking: When the employer pays for the employees’ parking at the workplace, there are no tax consequences for the employees whilst the business gets tax relief for the expense.

Please contact me if you want further information on any of these tips

Cry Freedom

An article by Ken Frost

In theory, we live in a transparent democracy where information about the activities of the state and its organs should be relatively easy to access. Indeed, the Freedom of Information Act is meant to improve that transparency.Not so it seems over at HMRC.On the HMRC site you can view an online version of the National Insurance Manual.Excellent!Here is a link to the page about NI Fraud.Can you spot the "slight" problem here?Good isn't it?Poor old HMRC really haven't grasped this "freedom" thing, have they? Click here to read the rest of the story