Saturday, October 22, 2005

Smart way to gain tax relief on property investment top-up loans

Scotsman.com Business
RONNIE LUDWIG

"THANKS to a little-known change in the tax laws, property investors can obtain income tax relief of up to 40 per cent on top-up mortgages.

Under rules introduced in 1998 - but seldom taken advantage of - the method of calculating profits from property letting for tax purposes is done on the same basis as the profits of a trade. It is a subtle change. But, it is a long-established principle that, where the value of balance sheet assets in a business has been replaced by bank borrowing, the interest on the borrowing will qualify for relief.

Applying this to buy-to-let property opens the door for thousands of investors to obtain income tax relief on top-up mortgages - even if the funds borrowed are not used in their property letting business: they could be used to pay off your mortgage on your principal home, for school fees or even a new car purchase.

Take the example of an investment property which originally cost £100,000, upon which a £40,000 mortgage is secured. If you want to double the mortgage to £80,000 - but will spend the additional £40,000 in a way that has nothing to do with the property - you can obtain full tax relief against your rental income for the whole amount of the interest paid on the increased mortgage.

If you put the extra money borrowed into your pension fund, top-rate income tax relief is due on both the interest paid and sum borrowed once invested into your pension. But, to obtain tax relief for the full amount of interest paid, the total borrowings must not be more than the cost of the property.

There is, however, a way around this. Consider the case of someone who bought an investment property several years ago for £100,000, with a mortgage of £40,000, but the property value has surged to £200,000. They want to increase the mortgage by £100,000 to £140,000, use the extra cash to invest in their pension, clear other debt and go on a world cruise.

This is possible if the investor transfers the property to their spouse's name, thereby starting a new property investment business. From that point, total borrowing is not restricted to the original purchase price and can be based on the full current market value.

There would be no capital gains tax on the transaction, because it is an inter-spouse gift. Nor would there be any inheritance tax payable, again due to the inter-spouse exemption."

• Ronnie Ludwig is a partner at chartered accountant Saffery Champness in Edinburgh

Now this is a move I was not aware of... but it reinforces my belief that you should take specialist advice when it comes to tax matters. The local accountant who does your income tax returns will just not be aware of the many opportunities for reducing tax that exist.

Chris Bell

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15 Comments:

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At 9:12 am, Blogger kredietlenenhypotheken said...

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Groeten Albert.

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