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Landlords missing out on top up mortgage tax relief

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Buy to let property investors may be missing out on income tax relief of up to 40 per cent on top up mortgages under a little known tax break, says Ronnie Ludwig of the Scotsman.

The tax revision, introduced in 1998 but little publicised or taken advantage of, mean that profits from buy to let rent yields can be calculated on the same basis as the profits of a trade. It is a small change, but has the upshot that where the value of balance sheet assets in a business has been replaced by bank borrowing, interest on the borrowing is eligible for relief.

In buy to let terms this means that thousands of investors are able to claim income tax relief on top up mortgages, with the principle remaining true even if the mortgage sum is used for personal purchases or investments outside of the borrowers buy to let business.

Mr Ludwig offers the example of a £100,000 property investment with a £40,000 mortgage secured against it. If the owner doubled the value of the mortgage to £80,000, they could then spend the extra £40,000 on whatever they wished and obtain full tax relief against rental income for the full amount of interest paid on the extra mortgage borrowing

Paid into a pension fund, the money would receive top rate income tax relief on both the interest paid and the sum borrowed once invested into the pension. To qualify for the full amount of interest paid the total borrowings must be no more than the value of the property at the original purchase.

An additional loophole provides a way around this, however. In the case of someone who bought an investment property several years ago for £100,000 on a mortgage of £40,000, and seen the value increase to £140,000. They wish to increase their mortgage by £100,000 to £140,000, invest the extra cash in their pension, clear additional debts and take a world tour.

They would simply have to transfer the property to their spouse's name, starting a new property investment business. Total borrowing would therefore no longer be restricted to the original price and would be based on the current full market value. Both capital gains tax and inheritance tax are avoided as it would be considered an inter spouse gift.

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