Landlords are aware that since the withdrawal of MIRAS in April 2000 it is no longer possible to claim any tax relief for owning your own home. However, Amer Siddiq and Authur Weller of the website Property Tax Portal explain to Property Hawk users how it is possible for landlords to use their property investments to gain interest relief on their main residence through some careful financial planning.
Where do professional landlords go to get their buy-to-let insurance?
As most property investors are aware, it is not possible to claim interest relief on a landlords’ main residence. This is because a landlords’ main residence does not form part of the property business.
Therefore, because no rental income is received from a landlord’s main residence (exception being the rent-a-room-relief), they cannot claim interest relief against their income.
However, a landlord will also be aware that they can claim interest relief on properties that form part of their property business i.e. their buy-to-let portfolio. In such instances they can offset their mortgage interest on their let properties against any rental income received.
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 Can Landlords Get Tax Relief on their 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.
John buys a 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 bought 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.
- 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.
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:
Landlords can see that will a little bit of careful tax planning and reshuffling of their mortgage finances it is perfectly possible for them to save tax. For more information on tax issues on Property Hawk landlords can use the Google search box or go to the Landlords Bible.