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‘What types of ‘interest’ can be offset against my property income?’

It is common knowledge that it is possible to offset ‘interest’ payments against property income.

However, what the vast majority of investors don’t understand is exactly what types of interest can and cannot be offset against property income.

Well, don’t worry as in this strategy I will explain and illustrate THREE different types of interest that you can offset.

Remember: ‘knowledge is power,’ and the more you know about property tax, then the greater chance you have of reducing it.

No doubt, most of you will be paying some or even all of these types of interest, so it means that you CAN start reducing your tax liabilities further!

Just like the previous Property Tax Strategy, I recommend that you print off and file this strategy away so that you have easy access to it whenever you are off-line!

So, let’s get on with learning what they are!

Interest on mortgages
It is probably fair to say that this is the most common type of interest that is associated with property investors.

This interest relates to the amount you pay back to your mortgage lender that is above and beyond the initial amount that you borrowed.

It does not matter if the mortgage is a ‘repayment’ or an ‘interest-only’ mortgage. The fact that interest repayments have been made means that they can be offset.

Let me illustrate this through the following case study.

Case study (1)
John buys an investment property for £100,000.

The finance for the property is made up of a £20,000 deposit (provided from his personal savings) and an £80,000 buy-to-let mortgage, provided by the NatWest bank.

In the first year of the mortgage he pays £2,500 in interest. This WHOLE amount can be offset against his income from the property.

This means that if he received £5,500 income from his property, then he would only be liable to pay tax on only £3,000!

Interest on personal loans
If you take out a personal loan that is used ‘wholly and exclusively’ for the purpose of the property, then the interest charged on this loan can also be offset.

The important point to note here is that personal loans MUST be used in connection with the property.
Here are some examples when the interest charged on a personal loan CAN be offset against the property income.

a)     Loan used for providing deposit.
Most buy-to-let mortgage lenders require you to provide a 20% deposit before they will lend you the remaining 80% in the form of a mortgage.

If you don’t have the 20% deposit readily available, then it is likely that you may well need to finance the deposit by getting a personal loan.

If you do take out a personal loan for the 20% deposit, then the interest charged on this loan CAN be offset against the property income.

If you are considering or have already done this, then what this means is that you have a 100%-financed investment property, where interest charged on both the mortgage and the personal loan can be offset against the rental income.

b)     Loan used for refurbishments/developments.
Periodically, you will need to refurbish or even develop a property.

Imagine that you have just purchased a property that needs total redecorating and modernising.

If you take out a loan for carrying out this work, then the interest charged on the loan can be offset against the property income.

Alternatively, you might decide to embark on a more expensive property extension, i.e., build a conservatory.

Again, the same rule applies here – the interest charged on the loan can be offset.

c)     Loans used for purchasing products
If you purchase goods from retailers where finance is available, and these goods are used in your property, then again, the interest charged can be offset.

This is more likely to happen if you are providing a fully furnished property, i.e., a luxury apartment.

If this is the case, then you may decide to buy the more expensive items on finance.

Such items are likely to include

  • sofas, dining table & chairs, beds;
  • cooker, washing machine, fridge/freezer;
  • carpets, flooring, etc.

If you are paying for these products over a period of time, e.g., 6, 12, or 18 months, then any interest charged can be offset.

OK, so you now know typical scenarios in which you can offset interest payments.

Well, what about some scenarios in which you can’t offset the interest payments?

Good question!

Here are some examples when the interest charged on a personal loan CANNOT be offset against the property income:

  1. loan used for paying for a family holiday;
  2. loan used for buying a new car;
  3. loan used for paying children’s tuition fees, etc.

It is clear from the above examples that all these scenarios have one common characteristic:
*** They have ABSOLUTELY NOTHING to do with the property investment! ***

So, suffice it to say that if the loan has nothing to do with your property investment, any interest repayments CANNOT be offset.

My best advice on this is to keep things simple and always ask yourself, ‘Is the loan being used for the sole purpose of my property?’

If the answer is ‘YES,’ then you can offset the interest.

If the answer is ‘NO,’ then you cannot offset the interest.

Interest on remortgage

If you have a mortgage on your investment property, then it is highly likely that you will consider moving to another lender at some point.

The main reason for this is likely to be because you are looking for a better mortgage deal.

As interest rates have been falling over the past few years, more and more people have been remortgaging their investment properties to capitalise on the better deals and to help grow their property portfolios.

Here are some pointers about remortgaging.

a)     If you remortgage your outstanding mortgage with another lender, then you can STILL offset the interest repayments.

Case study 2
Timothy has an outstanding mortgage balance of £50,000 on his investment property. He decides to move his mortgage from the NatWest to LloydsTSB as they are offering a lower rate of interest.

Timothy can still offset the entire interest charged by LloydsTSB on the £50,000 remortgage.

b)     If you remortgage for a lower amount, then you can still offset the whole interest

Case Study:
Timothy has an outstanding balance of £50,000 on his investment mortgage.

However, he inherits £20,000 from a family member. He decides to use this toward lowering his mortgage liability.

Therefore he only remortages to the value of £30,000 with LloydsTSB.

Again, the entire interest charged on the £30,000 can be offset against the property income.
c)     If you remortgage for an amount that is greater then when the property was first brought into the lettings business, then you can only offset the additional amount if it is used for the purpose of the investment property.

As property prices have sharply risen over the past few years, investors have being remortgaging their properties for higher values.

This is known as ‘releasing equity.’

You need to ask yourself, ‘Is the additional equity release being used for the sole purpose of my property?’

Right at the outset of this strategy, I mentioned that ‘knowledge is power.’

Having read this strategy, you will now appreciate that the more you know about property tax, the more you can plan ahead and reduce it.

Just as important is the fact that your tax education will help you from getting into unnecessary trouble should you be unlucky enough to be investigated.

If you have found this strategy useful, then this information really is the ‘tip of the iceberg’!