How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask Rakhi Vasavada Your Own Question
Rakhi Vasavada
Rakhi Vasavada, Financial Advisor
Category: Finance
Satisfied Customers: 4543
Experience:  Attorney and Financial Expert. Have specialization in Financial Laws.Practice experience of over 13 years
43581946
Type Your Finance Question Here...
Rakhi Vasavada is online now

My questions relates to tax efficiency options. I currently

Resolved Question:

My questions relates to tax efficiency options. I currently have a main residential property with a joint mortgage (with partner), separately I have 2 rented properties.
One has a buy to let mortgage (recently acquired) and the other about to remortgage to a buy to let as it was my main residence therefore not a buy to let mortgage.
While dealing with the mortgage advisor, the offers are 2, one variable flex rate capital repayment and the other similar except that it is an interest only mortgage. The question here is which mortgage, taking into account that I will now have 2 buy to let mortgages, should I go for, and if I opt for interest only, how would be the best way to declare the income for tax efficiency purposes, i.e., set a separate account for regular overpayments to reduce capital or go for an ISA or any other options?
thanks in advance
Submitted: 2 years ago.
Category: Finance
Expert:  Rakhi Vasavada replied 2 years ago.
Dear Friend,

Hello and welcome. Thank you for providing an opportunity to assist you.

I will keep the reply crispt and simple so as to avoid any complexity.

Interest only mortgages should be best avoided. With an interest-only mortgage, however, the whole of the monthly mortgage payment is made up of interest, so none of it goes towards paying off the loan. So if, for example, you took out an interest-only mortgage of £100,000, at the end of the mortgage term you would still owe your lender £100,000. The mortgage loan would go down only if you chose to make repayments of capital in addition to the monthly interest payments. That is largely why interest-only mortgages have lower payments than repayment mortgages.

Having said this, if you compare this to the regular repayment mortgages, most of your monthly mortgage payment is initially made up of interest, with a little of it going towards repaying the actual loan. Over time, however, more of the monthly payment goes towards repaying the capital with less being spent on interest. The further into the mortgage term you get, the lower the interest bill, because the size of the loan gets smaller.

Over and above all this, you will still have to show to the lender and satisfy him as to how will you replay the mortgage.

Usually, therefore, interest only mortgages are not preferred.The following is a very good reference and general information link.

http://www.aldermore.co.uk/resource-centre/personal/personal-guides/2013/07/the-pros-and-cons-of-interest-only-mortgages/


Taking your query further, you can opt for both, separate account of ISA. Separate account would be preferred as any additional payments would result into reduction of your loan amount and therefore your interest.

From tax point of view, it will make no difference as to how you declare it or if you have an ISA or a separate account.

I am sure this would help.

You may please leave a positive rating if this helps as this is the only way we are compensated for assisting you. Alternatively, you may revert back with a reply if you need further assistance or if I have missed out on any aspect of your question,

Warm Regards,

Customer: replied 2 years ago.

Thanks for your response.

I would like to clarify that my question was intended to look for a tax focus rather than the implications of opting for an interest only mortgage. I am aware of those and the intention is to set aside money to pay the capital during the term with overpayments and at the end with the savings. Just to make it easier to understand and putting it with numbers the first mortgage is on repayment of capital and interest, monthly payments of 380 and receive rent of 500 therefore 120 profit, the second flat has an interest only (intended) mortage of 200 per month and receive a rent of 700 a month so my intention is to put aside 500 to either make overpayments monthly or open an ISA in order to save for the repayment at the end but my question is for tax purposes what would be the most effective way of declaring the income because as I understand it even if the first rent only makes 120 profit and the second probably will leave less profit, the TAX office will see the full 500 for first flat and the full 700 for second flat as income so how can I demonstrate that most of the money will go back into the loan or if an ISA or a number of them are a good option.

thanks

Customer: replied 2 years ago.

Please let me know if you will be able to provide the answer as the first answer was not as expected, thanks in advance

Customer: replied 2 years ago.
Relist: Other.
The answer did not relate specifically to the question
thanks
Expert:  Rakhi Vasavada replied 2 years ago.
Dear Adrian,

Hello again. I am sorry if my reply did not help you. I think I am not getting to the core of your question.

Let me opt out and see if any other expert is able to assist you with that.

However, while I say that, I am sure, from I understand from your question, showing to the tax office the full amount should not be a problem. Let me explain this.

For example, in your second flat example, if you have mortgage payment of 200 and rent of 700 leaving you with 500 of profit, the 500 profit will REMAIN your profit even if you use that to make over payments towards your principal amount.

You will be able to claim the interest payment against the income but what you pay to the principal cannot be claim. That remains your profit. Tax office will have no concern if how you use your 500 profit. However, you will certainly be able to claim the interest that you pay.

You may please leave a positive rating if this helps as this is the only way we are compensated for assisting you. Alternatively, you may revert back with a reply if you need further assistance or if I have missed out on any aspect of your question,

Warm Regards,

Warm Regards
Customer: replied 2 years ago.

Many thanks that is much clearer for me, just to make sure I understand you correctly, you are saying that although the rental income will be considered as income, the tax office do take into account the interest I have to pay (and the capital?) in order to apply the taxes. In other words, In the example of 700 rent, the taxable income is 500, therefore taking into account the 200 interest but not the overpayments towards the capital repayments. Would that change if I opted for capital repayment mortgage or the taxable income is always all profiot excluding interest? And in that case do I need to start self assessment or the bank initiates that or the tax office? I want to make sure because I currently dont do self assessment. thanks in advance

Expert:  Rakhi Vasavada replied 2 years ago.
Dear Friend,

Hello and welcome again.

Yes, let me confirm that you have understood it correct. The tax office WILL take into account the interest paid. As you rightly understand, after claiming interest and mortgage payment of 200, 500 will remain taxable gains. The situation will not change to the best of my knowledge if you opt for capital repayment mortgage. Any income, as you correctly understand, in excess of expenditure would be a taxable event.

In most of the cases, you will do the self assessment.

I am sure this would help.

You may please leave a positive rating if this helps as this is the only way we are compensated for assisting you. Alternatively, you may revert back with a reply if you need further assistance or if I have missed out on any aspect of your question,

Warm Regards,
Rakhi Vasavada and other Finance Specialists are ready to help you

Related Finance Questions