Potential daft tax question.

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Potential daft tax question.
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Nick

Joined: 02 Nov 2004
Posts: 34535
Location: Hereford

Posted: Tue May 10, 11 3:56 pm Post subject: Potential daft tax question.

If I have a property with no mortgage on it, which I rent out, and an income after costs of ï¿½1,000 pcm, and end up paying 40% tax on that ï¿½1,000, does it make sense to borrow against the house, with an interest only loan, and instead of paying ï¿½400 to the tax man, pay it to a building society? Because then I'd have ï¿½100,000, or whatever the loan was, to sit in the bank, and earn me interest.

Clearly, I'd always owe the ï¿½100,000, and if interest rates go up, I'd have to be able to make my repayments, but that aside, am I missing anything?

This is notional, really, or at least the figures are nice and round for simple maths, rather than realistic.

Jb

Joined: 08 Jun 2005
Posts: 7761
Location: 91ï¿½ N

Posted: Tue May 10, 11 4:00 pm Post subject:
You'd be paying income tax on the interest. Interest rates for savings are low at present, vastly less than the mortgage payments. Taking a mortgage and letting the property could be an awkward combination putting up the cost of your mortgage and insurance. So I'd guess it's not as good an idea as it may first appear.

Nick

Joined: 02 Nov 2004
Posts: 34535
Location: Hereford

Posted: Tue May 10, 11 4:07 pm Post subject:

JB wrote:

You'd be paying income tax on the interest.
Interest rates for savings are low at present, vastly less than the mortgage payments.
Taking a mortgage and letting the property could be an awkward combination putting up the cost of your mortgage and insurance.

So I'd guess it's not as good an idea as it may first appear.

Tax on the interest, yep, but I'd still have 60% of it.

I'd only be paying the interest, and if I don't, I get to pay the tax man.

The mortgage doesn't actually have to be on the rented property; ridiculously, you can borrow against any property, and claim it as a cost, so wouldn't impact on insurance.

Treacodactyl
Downsizer Moderator

Joined: 28 Oct 2004
Posts: 25795
Location: Jumping on the bandwagon of opportunism

Posted: Tue May 10, 11 5:18 pm Post subject:
What would happen if you lost your tenant for a while, you'd still have to pay interest on the mortgage. You might get advice over on the MSE site.

RichardW

Joined: 24 Aug 2006
Posts: 8443
Location: Llyn Peninsular North Wales

Posted: Tue May 10, 11 5:31 pm Post subject:
Interesting idea if slightly risky due to interest rates changing. I guess you will need actual quotes for your situation. Could you set it up as your pension plan & so benefit that way?

Nick

Joined: 02 Nov 2004
Posts: 34535
Location: Hereford

Posted: Tue May 10, 11 5:34 pm Post subject:
The risk of the pension plan idea is that it could go down in value. The actual bricks and mortar are the pension plan, to be honest. The interest rates need watching, but given a fixed rate mortgage it should be manageable.

Shane

Joined: 31 Oct 2005
Posts: 3467
Location: Doha. Is hot.

Posted: Wed May 11, 11 4:21 am Post subject:

Wouldn't it make more sense to remortgage and buy a second rental property? That way your mortgage interest will offset the rental income (at least partially) and you'll have a second set of tenants paying off a second mortgage for you. You'll also be hedging your bets against one of the properties being empty for a period. It's what I'm intending to do if I get an extension to my contract out here - will probably buy a flat next, me thinks.

northmoor

Joined: 08 Aug 2008
Posts: 380

Posted: Wed May 11, 11 6:54 am Post subject:
you only get tax relief on the interest, so unless the mortgage interest matches to renal income, you will still pay 40% of the remaining rental income to the tax man.

Shane

Joined: 31 Oct 2005
Posts: 3467
Location: Doha. Is hot.

Posted: Wed May 11, 11 8:01 am Post subject:
True, but at the same time you've got some nice tenants paying off the bulk of your assets for you.

Nick

Joined: 02 Nov 2004
Posts: 34535
Location: Hereford

Posted: Wed May 11, 11 8:06 am Post subject:

Shane wrote:

It's a possibility, yes.

wipka84

Joined: 07 Feb 2009
Posts: 221
Location: Essex, UK

Posted: Wed May 11, 11 10:53 am Post subject:
Given the amount you might stand to save, it's probably well worth an accountant's consultation fee to tell you what option is the best.

Shan

Joined: 13 Jan 2009
Posts: 9075
Location: South Wales

Posted: Wed May 11, 11 3:50 pm Post subject:

Nick wrote:

The risk of the pension plan idea is that it could go down in value. The actual bricks and mortar are the pension plan, to be honest.

The interest rates need watching, but given a fixed rate mortgage it should be manageable.

The risk is exactly the same with property - values don't always go up adduming it does, the 20 year average per year is not very good anyway.

Nick

Joined: 02 Nov 2004
Posts: 34535
Location: Hereford

Posted: Wed May 11, 11 3:58 pm Post subject:

Shan wrote:

Nick wrote:

The risk is exactly the same with property - values don't always go up adduming it does, the 20 year average per year is not very good anyway.

What's the value of ï¿½100,000 of shares if they collapse in value by 98%?

Nothing.

What's the value of ï¿½100,000 of house if it collapses in value by 98%?

Lots. It keeps the rain off, and you can live in it.

Shan

Joined: 13 Jan 2009
Posts: 9075
Location: South Wales

Posted: Wed May 11, 11 4:09 pm Post subject:
You could also put your money in the bank and get a better average over 20 years.

Treacodactyl
Downsizer Moderator

Joined: 28 Oct 2004
Posts: 25795
Location: Jumping on the bandwagon of opportunism

Posted: Wed May 11, 11 4:10 pm Post subject:

Nick wrote:

Shan wrote:

Nick wrote:

The risk is exactly the same with property - values don't always go up adduming it does, the 20 year average per year is not very good anyway.

With a personal pension you can invest in property funds that should be less risky than a single property. As single property could be just as volatile as owning single shares. On the other hand less volatility often means a lower return, swings and roundabouts and all that.

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