Optimise finances in light of changes to mortgage interest relief

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    Optimise finances in light of changes to mortgage interest relief

    Hi,

    I have owned a 1 bedroom property in London for the past 15 years and have a BTL interest only mortgage of ~£150,000 with a very good interest rate.

    Having submitted my tax return recently and had to cough up a few grand in tax I want to consider my options as the tax year about to end in April will be the last year any I can get any of the interest reliefe allowance and 20% finance costs relief will apply.

    I am fortunate enough to have a chunk of cash available which I could use to repay some or all of this mortgage. Maybe this is venturing into financial advisor territory but if I'm paying ~2.5% in interest every year and I can't write off that any longer, I have to be earning more than 2.5% on the cash for it to be a better decision to keep it as cash, rather than paying off the mortgage.

    Mortgage interest is my single biggest expense ~£3,800 compared to about £4,800 for service charges, estate agent fees etc which are all deductible. After next year I will be paying 100% of this interest cost so I might as well avoid it. I will still have to pay tax on my rent minus the £4,800 costs as the interest cost isn't considered for tax purposes even though I am still paying it.

    I'm curious if anyone else is in a similar situation and if they can share their experiences/thoughts.

    Thank you in advance

    #2
    I don't have an answer for your situation, but my understanding (and this is developing as I speak!) is that even with the new regime you will still get tax relief at 20% on the finance interest rather than at your highest rate. Is this not correct? Or is that not the case for you for other reasons that we don't need to discuss? Thanks.



    Comment


      #3
      I don't see how you will be paying 100% of the interest cost.
      You will be limited to a 20% relief, which might be tough if you're a higher rate tax payer, but, even then, it means that the amount you can recover from HMRC is cut in half, not eliminated altogether.
      When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
      Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

      Comment


        #4
        Having done some further research (I had some some before also) I believe that when the new rules are in full effect from 2020/21 tax year I will be allowed "relief of 20% on the total amount"

        An calculator here: https://www.themortgageworks.co.uk/s...relief-changes seems to illustrate it pretty well using some round numbers.

        The summary is that before the new rules kicked in (assuming income and expenses remained the same) the tax due was £1,988 but it is now £2,988 - an increase of about 50%.
        tax.jpg

        Comment


          #5
          Unfortunately nothing ever stays the same, residential mortgages used to allow 30% of the mortgage interest to be offset for tax purposes for each borrower and now there is no relief , BtL loans allowed 100% of the interest to be used against the rental income which is now only available for Limited Company loans and from this year a maximum of 20% for BTL’s in a personal capacity.
          Life is never fair but we have to cope with change and indeed the return on capital still outperforms the rate of interest even on a building society 3 year Fixed rate Deposit but with the potential of capital growth.
          The TMW calculation is indeed a useful tool.

          Comment


            #6
            Originally posted by ringzer View Post
            The summary is that before the new rules kicked in (assuming income and expenses remained the same) the tax due was £1,988 but it is now £2,988 - an increase of about 50%.
            Once you take into account increases in the personal allowances and higher tax rate bands, the increase works out about neutral on those figures.
            But to be blunt, you've only just woken up to this now when it was announced back in 2015, you should have been planning since then. What else don't you know?

            Comment


              #7
              Originally posted by ringzer View Post
              The summary is that before the new rules kicked in (assuming income and expenses remained the same) the tax due was £1,988 but it is now £2,988 - an increase of about 50%
              Yes, so you're still receiving some allowance on the interest, so your comparison for deciding what to do with your cash is whether whatever else you can do with it is more profitable.

              You would need a financial advisor, but (personal view) your issue isn't tax it's the running costs.
              If a third of the rental income is being paid out as operating costs, that's chewing into your profit already.
              When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
              Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

              Comment


                #8
                Originally posted by loanarranger View Post
                the return on capital still outperforms the rate of interest even on a building society 3 year Fixed rate Deposit but with the potential of capital growth.
                ...and the potential for capital loss, revenue loss, huge stress, physical violence, criminal charges and even jail time for getting it badly wrong.
                You don't get that from a fixed rate deposit account!


                Comment


                  #9
                  So true , but for the honest man/woman still better than the Instant Access of 0.10%

                  Comment


                    #10
                    It's also the only investment where normal people can borrow against the security of the asset being invested in, subsidised by the taxman.
                    When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                    Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                    Comment


                      #11
                      Originally posted by loanarranger View Post
                      So true , but for the honest man/woman still better than the Instant Access of 0.10%
                      Better than pensions, self investment, ISA's, company share schemes etc?

                      (Sorry to labour the point loanarranger, I know you realise all this)

                      Comment


                        #12
                        Originally posted by jpkeates View Post
                        It's also the only investment where normal people can borrow against the security of the asset being invested in, subsidised by the taxman.
                        It's not JPK, it is just the first thing people like us think of because that is what we've done.

                        Comment


                          #13
                          Originally posted by boletus View Post
                          It's not JPK, it is just the first thing people like us think of because that is what we've done.
                          OK, that's an interesting point.
                          What else could I be doing? (Landlording is risky and quite hard work, sometimes!)
                          When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                          Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                          Comment


                            #14
                            Originally posted by boletus View Post
                            Once you take into account increases in the personal allowances and higher tax rate bands, the increase works out about neutral on those figures.
                            Do you mean, the increase in personal allowance between 2018/2019 and 2019-2020 of £650? If so, then I guess it does.


                            Originally posted by boletus View Post
                            But to be blunt, you've only just woken up to this now when it was announced back in 2015, you should have been planning since then. What else don't you know?
                            Yes I've been aware of them since they were announced (I had to know about it as I did my tax returns!). I'm not particularly sure what can be done to avoid it if at all, but as it is the last year of the transition period (2018/2019) I thought I would see if I'm missing something.


                            Originally posted by jpkeates
                            You would need a financial advisor, but (personal view) your issue isn't tax it's the running costs.
                            If a third of the rental income is being paid out as operating costs, that's chewing into your profit already.
                            Well I was using very round numbers for the purposes of illustration but my actual numbers for 2019/2020 are: rental income was £18,000, ground rent and service charges was £2,100, estate agent fees was £1,400 and misc repairs was £500. So about 25% rather than 33% running costs (excluding interest).

                            Comment


                              #15
                              Makes more sense now.
                              When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                              Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                              Comment

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