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TonyTax
TonyTax, Tax Consultant
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I will be reaching out to my current mortgage lender

Resolved Question:

Hi,
I will be reaching out to my current mortgage lender to draw money from the equity generated from my residential property to fund purchase of second home (for rental). This would make me a cash buyer for the second property. If I rent out this property, would I still be able to deduct the interest payment from the rental income and only pay tax on the balance?
Even though the second property is deemed as cash buy, I have still taken out a loan from my residential property to fund the purchase.
I prefer this option compared to the buy-to-let mortgage as the rules are changing in April 2017 anyway.
Could you kindly provide some clarity around my tax obligation as a landlord?
Thanks
Submitted: 10 months ago.
Category: Tax
Customer: replied 10 months ago.
To provide more clarity, my existing residential property is on fixed rate 5 years repayment mortgage. My lender (TSB) has agreed to lend me money by using the equity from this property to purchase 2nd home (flat for renting).In a buy-to-let mortgage either interest only or repayment, one can claim the interest payment and deduct from the rental income, agent fees etc and only pay tax on the balance.Would I be able to use the same principles for the 2nd property which is deemed as cash buy rather than a buy to let? I will still have to pay the bank for lending me the money even though the loan is against the residential property.Thanks Abhi
Expert:  TonyTax replied 10 months ago.
Hi. It doesn't matter how the mortgage finance is secured. So long as you use the money raised to buy the property, the interest will be fully deductible from any rental income, at least until the start of the 2017/18 tax year. Take a look here for the types of expense you can claim a deduction for. As you will see here, from 6 April 2017, the way tax relief will be given for interest paid on loan finance for a buy to let will be changed over three tax years gradually reducing the tax relief given from a maximum of 45% to 20%. I hope this helps but let me know if you have any further questions.
Customer: replied 10 months ago.
Thanks for the clarification. So is there any value in me taking out a buy to let mortgage at all? The only reason I was told to do so because it's the preferred approach and most common by the landlords. This helps them take out an interest only mortgage and only pay tax on on the balance (deduct interest payment from rental).As far as I am concerned, I am interested in a repayment mortgage... even as a cash purchase of the 2nd home, If I can claim the same tax benefits (as a buy to let option) till 2017, that would seem more obvious in my opinion. Although preferred by landlords it seems the buy to let mortgage is bit of hassle as I will have to prove the guaranteed rental income from the property to secure the mortgage in the first place and also 25% initial deposit.
As a cash investment of the 2nd property, the bank has no issue in handing me the money. also the interest rate is cheaper than the buy to let mortgage. I couldn't figure out what was the catch and why cash investment wasn't a good idea.Would you be in agreement?Thanks again.Abhi
Expert:  TonyTax replied 10 months ago.
I cannot advise you on the merits or otherwise of such an investment or the type of mortgage you should take out and how to secure it. If it was me, however, I would have a repayment mortgage and use every penny of the net rental income income to pay off the mortgage as soon as I could. The coming changes in tax relief for mortgage interest make borrowing less attractive but that's how most people get involved in buy to let. They don't have the free cash lying around doing nothing to be cash buyers or don't want to tie up their capital.
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15759
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
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