Are there tax benefits in keeping our mortgage?

We rent out our main home, which has a small mortgage. We are now able to pay it off, but wondered whether there were tax benefits to retaining it?

Q We rent out our main home while we travel. We have a small mortgage on it that we are now able to pay off, but wondered whether there were tax benefits to retaining it? To complicate matters further we are considering buying a flat as a base for us to return to intermittently, but we can't work out whether it would be better to take out a large mortgage on the flat or draw down money from our main home. Any ideas?

A Yes there are tax benefits to retaining the mortgage on the property you let. The interest - but not any repayment of capital - can be deducted from your rental income as a business expense, which reduces your income tax bill. So if you receive £1,000 in rent, for example, but pay out £800 in mortgage interest, you only have to pay tax on £200 of the rent (assuming you have no other expenses that could reduce the tax bill still further).

You can claim mortgage interest as a business expense on a mortgage up to the value of the property when you first let it. So there could be tax advantages to extending the mortgage on the property you let to finance the purchase of your flat. So if, for example, when you first let the property its value was £100,000 but your mortgage was only £75,000, you could extend the mortgage to £100,000 and still be able to claim all the interest as a business expense. However, if you extended the mortgage over and above £100,000 you would not be able to use any of the interest on the loan amount above £100,000 to reduce your tax bill.

More detailed technical information on the tax aspects are available from HM Revenue & Customs.


Virginia Wallis

The GuardianTramp

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