Reducing Income Tax on Rented Property

[DF]

I have a property which is rented. The outstanding mortgage is £65K. The flat is worth about £130k. My other (main) property is on a flexible mortgage, the balance of which is about £175K.

Is it possible to remortgage the rented property for say £115K, thus releasing £50K of equity and then, because of the increased interest payments on this property, reduce my tax liability on the rental income. The £50k would be used to reduce the balance of the mortgage on my main residence. The aim in effect is to transfer equity from the rented property to my main home and reduce taxes at the same time. Is this possible and are there any CTG or other implications.

[Nigel Lord]

DF

Unfortunately your proposal would not increase the amount of mortgage interest relief.

Income tax relief in respect of loan interest relating to let properties is restricted to loans taken out for the purchase or improvement of the land, buildings and contents; or to replace existing qualifying loans.

In your circumstances the interest relating to the part of the loan used to repay the mortgage on your own home would be disallowable.

Nigel Lord
Lord Associates Taxation and Business Consultants
102 Smarts Lane
Loughton
Essex IG10 4BS
020 8508 1642
lordassociates@ntlworld.com

[Huw Williams]

As you will have seen from the previous answer, there is little chance of a deduction for any more interest if you are simply refinancing existing debt.

However relief is available calculated on normal business principles, so if you were to borrow to put more money into the business, perhaps to improve or substantially repair the property or to buy a second property, relief should be available on this element.

Huw Williams
enquiries@huwwilliams.co.uk