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  • Tax

    Paying down BTL mortgages



    Reducing mortgages is thought of by some as a way to mitigate the effects of s24. Wrong. Unfortunately reducing your BTL debt does not solve the fundamental problem of being pushed into a higher rate tax bracket and paying tax on rental profits that don't really exist.

    In fact paying down debt may actually increase your tax bill, not reduce it because if your interest payments get smaller, your 20% basic rate tax reduction will also get smaller.

    There are other good reasons for reducing mortgage debt but mitigating s24 is not one of them.

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    "In fact paying down debt may actually increase your tax bill, not reduce it because if your interest payments get smaller, your 20% basic rate tax reduction will also get smaller."

    That is true BUT you also won't have paid the interest!  So for each £100 interest you don't pay you will save £100 interest but your tax bill will go up by £20 (ish) - still £80 better off.

    The question of whether or not to pay down should be based upon far more than tax.  ie what rate you are paying interest at, what alternative rate you could get on your money etc.


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    I agree but there is a school of thought out there that reducing mortgages means less s24 tax to pay. It doesn't.

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    Reducing debt can if done correctly will improve the overall position post s24. 

    By reducing the size of the portfolio targeting underperforming properties (i.e. those barely washing their face) and using the surplus to reduce the debt on other properties wi;; leave the landlord in a position of reducing their outgoings on Mortgages and leaving them with more cash in their pocket. 

    I agree that it most probably won't reduce the tax bill but the ultimate objective is to be left with more disposable income and it is this which can be achieved with the correct planning.

    Nigel

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    Nigel Reynolds FCCA CMgr FCMI

    Property Tax Specialist

    Reynolds and Co

    http://www.reynoldsandco.co.uk


    if you have the cash, are not receiving tax relief (because of s.24) and pay interest higher than what you receive in the bank then surely its a valid business decision to reduce debt on the worst mortgages.

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    I think a better use of money is to use it to buy as many properties as possible to take advantage of the coming boom. Leverage is very good at this stage of the property cycle. You won’t catch me paying down any of my mortgages at this time.
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    coming boom... are you serious?  why do you think that...

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    Because I know about economic cycles that repeat on average every 18 years or thereabouts going back hundreds of years starting with Henry VIII and the dissolution of the monasteries.
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    Many thanks for that nugget.  I wasnt expecting dissolution of the monasteries to have more relevance to today than Brexit, s.24, licensing, deposit caps, fee bans, min. room sizes, end of 10% wear and tear allowance, right to rent checks, endless gov. interference, etc, etc!

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    " Many thanks for that nugget.  I wasnt expecting dissolution of the monasteries to have more relevance to today than Brexit, s.24, licensing, deposit caps, fee bans, min. room sizes, end of 10% wear and tear allowance, right to rent checks, endless gov. interference, etc, etc! "

    Good points!

    YJ80 referring back to Henry VIII times is stretching things a tad.

    If you'd have mentioned every single one of your modern day factors back in Henry VIII days you'd have been burnt at the stake!

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