Can excess mortgage payments be offset against tax?

is PAYG so effectively all the money I make from the property rents will be taxed at the base rate (22%).

I have worked out my total profit and it is something in the region of

5K. What I am wondering is if I pay off an ammount of the mortgage on one of the flats will that count as a legitimate expenditure that I can then subtract from my total profit to reduce my tax liability.

Some work needs to be done on the flats which will legitimately lower the ammount of profit I make but paying off a lump sum on my mortgage will be a much less wasteful way of lowering my tax bill if it is legitimate.

Please let me know if this is OK. I'll be watching this group trough google so will be able to answer any clarifying questions anyone may have.

Many thanks SL.

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NO!! Capital repayments are not tax deductible. Your question makes me wonder whether you've previously been claiming all your mortgage payments against tax (ILLEGAL), or just the interest element (ALLOWED).

In message of Wed, 22 Mar 2006, Slum_Landlord writes

Mortgage capital repayments are not an allowable expense at any time. It is a repayment of capital.

DF

Slum_Landlord,

If you move 5K from a current account to a savings account of some sort there is a transfer of cash but no expense. You still have the asset. You just moved it around.

When you pay down a loan you do not get to deduct the principal repaid. You did not get taxed when you received the loaned funds. You do not get a tax deduction when you pay the funds back.

What you can deduct are expenses. Expenses for repairs that are not capital improvements is one example. Interest paid for borrowing money is also another.

John Corey

OK ... thanks for that. This is my first year of having the mortgage on a property (I bought the others with cash in hand when prices were nostalgically low. Now I have to buy with a mortgage.

The majority I have paid to the mortgage company so far this tax year (just over 50%) represents interest on the loan so I will be able to claim some of it as an expence. I called the company to ask for a tax voucher so that I know just how much. I've also talked to builders about doing some non-essential improvements to the properties to bring my profits for the year down a bit. I may even pay off some of the capital anyway if I can't find a better use for my savings.

Many thanks on all the advice given. I'll know what to expect from now.

SL.

Improvements cannot bring profits down. Only repairs and maintenance can do that. Whether they are "essential" or not is irrelevant.

Improvements go into the balance sheet, not P&L, and will reduce your taxable capital gain when, in due course, you come to sell the property.

But what do you mean by "improvements"? If you're making it look nice instead of shabby, that can count as maintenance, much like routine redecorating does. Only if you're making something objectively better, such as replacing a crappy modern designer gas cooker with a decent antique Aga, this would be an "improvement" not allowable as an expense.

Could be a good idea, especially if the mortgage is flexible so that you can re-borrow the repaid capital by just asking for it and without needing to re-apply for a loan.

Worth doing the sums. Bear in mind that loan interest set against rental income will lower your taxable profit, so in effect the loan is only costing you 78% or 60% of what it nominally does, whilst savings interest, similarly, is also only worth 80% or 60% of what it says. You can thus compare the loan and savings interest rates at par (exactly if you're a higher rate taxpayer, approximately if not). So if the loan rate exceeds the savings rate (as it's almost bound to), you're better off repaying the loan.

For example, if you have £10k in a savings account paying 4.5%, and your loan (more than £10k) costs you 6%, then the savings interest you earn (as a normal rate taxpayer) would be £450 gross, £360 net. Paying off £10k worth of loan would save you £600 a year, which would make £600 more of your profit taxable, costing you £132 in tax, and making the saving effectively only £468. But that's still more than £360.

In message , Slum_Landlord writes

Improvements of any nature, (essential or otherwise), are capital and dont affect profit. Repairs affect profit.

In message , Slum_Landlord writes

NO, they need to be essential repairs or maintenance. If you are 'improving' then that is capital too.

What do you mean "essential"?