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Claiming interest on loans and finance as a business expense is one of the regular top questions from property investors.
This Guest Article has kindly been written for us by Steve Sims, author of ‘Understanding And Paying Less Property Tax For Dummies’. Steve and his wife Amanda also have a boutique accountancy business which specialises in providing property tax advice and accountancy services for buy to let property investors.
Like many tax and business questions, no right or wrong answer applies to everyone.
One of the main deciding factors is the property investor’s attitude to risk.
Some can accept a degree of risk against their property assets, including their own home, while others prefer not to take a chance with their home.
To help property investors decide how to best handle their business finances, here are some answers to the most frequently asked questions:
Should I pay off my buy to let mortgage?
From a business finance standpoint, mortgage finance is a good thing – it’s just a case of the degree of risk an individual investor is prepared to live with.
Leveraging – or borrowing against – assets is all part of business and everyone wants to fund expanding a business with someone else’s money.
Interest on business finance is a profit reducer. Every pound reclaimed as interest reduces profits.
For example, a landlord makes £6,000 rent and pays out £5,000 a year mortgage interest, leaving a taxable profit of £1,000. The tax bill is £200 at 20% income tax.
A mortgage free property would have resulted in a £6,000 profit and a tax bill of £1,200 at 20% income tax.
Meanwhile, that £5,000 borrowing gives the investor financial options – to withdraw to spend, or to withdraw to save.
Should I pay off the mortgage on my home?
Unlike business finance, personal mortgage repayments attract no tax relief. Paying off a personal mortgage by refinancing buy to let property switches the risk from your home to your business and reduces tax at the same time.
Can I claim interest on credit card debts and overdrafts?
If the credit card balance or overdraft was run up to fund a buy to let business, the business can pay the interest. You need to show from invoices and statements that the money was directly spent on a buy to let business.
Can I claim interest on my home mortgage if I raised a buy to let deposit from remortgaging?
Yes, security for the debt is not relevant, it’s the use the money was put to that counts.
Claiming interest on finance is an area closely examined by tax inspectors – it’s a good idea to take professional advice and keep good financial records, like statements from lenders.
Don’t forget only interest is an allowable business expense – repaying the capital is not allowed.
If you need a property business check or help keeping financial records and preparing tax returns, a link to Steve’s web-site can be found HERE.
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