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My wife and I pay half the interest on our daughter's £236,000 mortgage.
The fixed-rate deal expires at the end of August so we are considering how to re-finance. We own an investment property left to us in my mother's will in 1999. The probate value was £60,000 and it is now worth about £170,000. We are considering raising a mortgage on this flat and have been told that if we borrowed £60,000, tax relief would be granted on the interest. We would then use the money to reduce our daughter's mortgage. Does this sound a sensible option?
Maggie Fleming writes:
From a tax point of view, this is sensible, especially if either of you is a higher rate taxpayer and the flat is generating a healthy profit each year. The mortgage interest is a deductible expense of your rental business; it will reduce your profit and therefore your tax liability. Tax relief is available on the interest on loans used to buy property which is then let out and also on loans funding repairs and improvements. If the property has no mortgage on it, or only a small one, it can be mortgaged up to its original value or, if greater, what it was worth when it was first let out.
In your case, that was the probate value, so you will indeed qualify for tax relief on the interest on a £60,000 loan. The capital released can be used for any purpose - business or private. In situations where one spouse owns a rental property, it is possible to increase the amount of loan qualifying for interest relief by transferring the property at a later date to the other spouse at market value. This new figure then becomes the maximum loan qualifying for relief.
As you are no doubt aware, lenders normally charge a higher rate of interest on buy-to-let loans than they do on residential loans, so you need to make sure that the tax relief outweighs any additional charges.
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