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The Seven Deadly Tax Saving Strategies - Four of Seven
Welcome to the Fourth of Seven Property Tax Saving Strategies brought to you by Homes Seekers on behalf of Amer Siddiq.
Strategy 4 - Make Sure You Know When You CAN and When You CANNOT Offset Interest Charges Against Your Property Income
I really hope that each of the tax strategies provided to date have demonstrated how YOU can slash both your capital gains and income tax liabilities, just by following some simple strategies.
This strategy is a little different as it contains some case studies. Many of you have come back to us asking for examples showing how it all works in easy-to-understand terms.
One question that pops up time and time again is... 'What types of 'interest' can be offset against my property income?'
It is common knowledge that it is possible to offset 'interest' payments against property income.
However, what the vast majority of investors don't understand is exactly what types of interest can and cannot be offset against property income.
Well, don't worry as in this strategy I will explain and illustrate THREE different types of interest that you can offset.
Remember: 'knowledge is power,' and the more you know about property tax, then the greater chance you have of reducing it.
No doubt, most of you will be paying some or even all of these types of interest, so it means that you CAN start reducing your tax liabilities further!
Just like the previous Property Tax Strategy, I recommend that you print off and file this strategy away so that you have easy access to it whenever you are off-line!
So, let's get on with learning what they are!
1. Interest on mortgages
It is probably fair to say that this is the most common type of interest that is associated with property investors.
This interest relates to the amount you pay back to your mortgage lender that is above and beyond the initial amount that you borrowed.
It does not matter if the mortgage is a 'repayment' or an 'interest-only' mortgage. The fact that interest repayments have been made means that they can be offset.
Let me illustrate this through the following case study.
Case study (1):
John buys an investment property for £100,000.
The finance for the property is made up of a £20,000 deposit (provided from his personal savings) and an £80,000 buy-to-let mortgage, provided by the NatWest bank.
In the first year of the mortgage he pays £2,500 in interest. This WHOLE amount can be soffset against his income from the property.
This means that if he received £5,500 income from his property, then he would only be liable to pay tax on only £3,000!
2. Interest on personal loans
If you take out a personal loan that is used 'wholly and exclusively' for the purpose of the property, then the interest charged on this loan can also be offset.
The important point to note here is that personal loans MUST be used in connection with the property.
Here are some examples when the interest charged on a personal loan CAN be offset against the property income.
a) Loan used for providing deposit.
Most buy-to-let mortgage lenders require you to provide a 20% deposit before they will lend you the remaining 80% in the form of a mortgage.
If you don't have the 20% deposit readily available, then it is likely that you may well need to finance the deposit by getting a personal loan.
If you do take out a personal loan for the 20% deposit, then the interest charged on this loan CAN be offset against the property income.
If you are considering or have already done this, then what this means is that you have a 100%-financed investment property, where interest charged on both the mortgage and the personal loan can be offset against the rental income.
b) Loan used for refurbishments/developments.
Periodically, you will need to refurbish or even develop a property.
Imagine that you have just purchased a property that needs total redecorating and modernising.
If you take out a loan for carrying out this work, then the interest charged on the loan can be offset against the property income.
Alternatively, you might decide to embark on a more expensive property extension, i.e., build a conservatory.
Again, the same rule applies here - the interest charged on the loan can be offset.
c) Loans used for purchasing products.
If you purchase goods from retailers where finance is available, and these goods are used in your property, then again, the interest charged can be offset.
This is more likely to happen if you are providing a fully furnished property, i.e., a luxury apartment.
If this is the case, then you may decide to buy the more expensive items on finance.
Such items are likely to include
- sofas, dining table & chairs, beds;
- cooker, washing machine, fridge/freezer;
- carpets, flooring, etc.
If you are paying for these products over a period of time, e.g., 6, 12, or 18 months, then any interest charged can be offset
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