What are the tax implications of making overpayments to my mortgage?

Question: “I would like to understand the tax consequences of making regular and lump sum payments to pay off the capital on a ‘buy to let’ interest-only mortgage. Will I be required to pay extra tax when using the ‘excess monthly rent’ as monthly overpayments once the mortgage has been paid off?”

Answer: The answer to your question is simple. Any interest payment you make to your mortgage lender is considered a legitimate expense that can be used to offset your gross rental income for tax purposes. However, your capital repayment is not an allowable expense and cannot be offset against your gross rental income. It is best to consult your mortgage lender to determine interest payments and capital repayments.

As of April 2017, new rules have been enacted for residential property landlords claiming relief for interest paid to a lender.

Tax on Rental Income

Question: Can I classify the total monthly mortgage repayment against the full monthly rental or only the interest element?

Answer: Starting from April 2017, there are new rules for residential property landlords claiming relief for interest paid to a lender. Please note that only the interest component of the total monthly mortgage repayment can be treated as an allowable business expense to offset against your gross rental income. The remaining part is a capital expense that reduces the original debt you owe the lender, which is irrelevant to your rental business.

Signing Over a Property to A Child

Question: At what age can a parent transfer property to their child?

Answer: In this country, a child who is under 18 years of age cannot be a legal property owner. However, they can have beneficial property ownership, which is what matters. So, it can be done if you wish to transfer beneficial property ownership to a child of any age. But if the child is under 18, then an adult must hold the property in trust for the child. The adult’s name must also appear on the legal documents, and a deed of trust is required to show the child’s beneficial ownership.

What Is the Tax Position on Fees for Re-Mortgages?

Question: I am looking to re-mortgage one of my buy-to-let properties. This process incurs fees for both the lender and the conveyancer. Can these fees be tax-deductible?

Answer: If you plan to re-mortgage one of your buy-to-let properties, you should know that this would entail some fees. However, please note that these expenses are generally allowed for the borrower. As per page PIM2066 in the Property Income Manual on the HMRC website (www.gov.uk/hmrc-internal-manuals/business-income-manual/bim45815), any incidental costs incurred in obtaining loan finance, such as arrangement fees, are considered allowable. Therefore, the expenses incurred in setting up the loan are also permitted, assuming the loan is allowable.

Can I Still Claim Tax Relief?

Question: “I owned a house, which I moved out of and rented out by taking out an interest mortgage. After eight years, I have moved back into the property but still own another residence. Can I still claim tax relief on the interest for the buy-to-let mortgage? Also, is it possible for me to rent the property to myself so that I can claim tax relief?”

Answer: To begin with, renting a property to yourself is impossible. Also, it’s important to note that tax relief on the interest you pay to your lender is only available to reduce your taxable rental income. This relief cannot be applied if you have no rental income. Moreover, the interest you pay your lender cannot be used to offset against any other type of taxable income. It’s worth keeping in mind that starting from April 2017, there are new interest rules that apply to residential landlords.

Is the Following Possible About Buy to Let?

Question: Before I start my buy-to-let investment, please confirm if the following is possible: a) Can I take out a loan to purchase a buy-to-let property using my residential property as collateral? b) Can I claim tax relief on the interest paid on this loan against the rental income I earn from the property?

Answer: It is possible to offset a business expense against your rental income for tax purposes, which includes borrowing against your residential property. The crucial factor is that you are using the funds for your business. As of April 2017, new rules have been enacted for residential property landlords who claim relief for interest paid to a lender.

Is There Tax Liability?

Question: “I withdrew £60,000 from my mortgage and invested it in a savings account that offers a higher interest rate of 3% AER, while my mortgage rate is 0.98%. I need to pay my bank 0.98% of £60,000 as interest. I’m wondering whether I need to pay tax on the difference between the interest I receive from the savings account (3%) and the interest I pay on the mortgage (0.98%) or if I need to pay tax on the entire 3% because I’m paying interest on the loan anyway.”

Answer: You are not a money lender operating a lending business but an individual investor. Therefore, you must pay tax on the entire 3%. However, the 0.98% cannot be claimed as an allowable expense to offset against the 3%.

Is This an Expense or A Capital Charge?

Question: We own a property in the UK that we rent out to students. As the tenants change annually, we must sign a new agreement each year. However, our managing agents have informed us that the cost of drawing up this agreement cannot be claimed as an expense but as a capital charge. We have been renting out this property for 12 years, and this is something we are familiar with.

Answer: “If you take a look at www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2120, you’ll notice that if the lease is for a year or less, the legal expenses (such as the cost of creating a lease) and the agent’s fees are not considered capital expenditure. Therefore, they are allowable as revenue expenses.”.

Am I A Landlord or Not?

Question: My wife and I jointly own my mother-in-law’s flat, which we inherited in 2005. As per her will, the asset will be shared with my wife’s brother and sister. I raised funds to buy out their share by re-mortgaging my current house with an interest-only mortgage. We now own the flat without any mortgage, while my home is solely in my name with a mortgage on it. We have only ever left the apartment to our son for several years and then to our daughter, who is claiming housing benefits. We have never charged commercial rent as we intended to help them out. However, I have not declared this second property to HMRC. My mortgage will end next year, and I need advice on any risks or liabilities and how to mitigate them.

Answer: If you earn rental income and meet both of these conditions, you won’t be required to pay tax on it:

  1. a) Your income tax personal allowance covers the rental income you earned (without any other pay using up your budget); your allowable expenses on the property are equal to or greater than the rent amount.
  2. b) Your gross rental income (before deducting allowable expenses) is less than £10,000 per year, and your net rental income is less than £2,500 per year. You can find more information at www.gov.uk/self-assessment-tax-returns/who-must-send-a-tax-return.

If you realise that you owe tax to HMRC after reviewing your records, contacting them before they reach out to you is best.

Is this a tax-deductible expense?

Question: I want to upgrade my 15-year-old bathroom, replace the toilet, and redecorate for new tenants. Can I deduct the costs from my taxes?

Answer: “As per HMRC’s property income manual, even if the repairs are substantial, they will not be considered capital for tax purposes, provided that the character of the asset remains unchanged. For instance, if a fitted kitchen is refurbished, the work might include replacing base units, wall units, sink, etc., re-tiling, worktop replacement, floor coverings, re-plastering, and re-wiring.

If the kitchen is replaced with a comparable standard kitchen, it will be regarded as a repair, and the expenditure will be allowed. However, suppose additional cabinets are fitted, increasing the storage space or installing extra equipment. In that case, this element will be considered a capital addition and not allowed, applying whatever apportionment basis is reasonable on the facts.

The expenditure will be considered capital if the entire kitchen is substantially upgraded, such as replacing standard units with expensive customised ones using high-quality materials. In this case, there is no longer any relief for ‘notional repairs,’ which is the notional cost of the repairs that would have had to be carried out.”

Property Tax questions answered
Property Tax questions answered

Our service to you

If you are a self employed, business owner/director of company looking to get your accountancy and taxation matters sorted, look no further. We, at Naail & Co, are pro-active and easily accessible landlord accountants and self employed accountants in London, who will not only ensure that all your filing obligations are up to date with Companies House and HMRC, but also you do not pay a penny more in taxes than you have to. We work on a fixed fee basis and provide same day response to all your phone and email enquiries. We will also allocate a designated accounts manager who would have better understanding of your and business financial and taxation affairs. Book a free consultation call using the link below.