If I buy a property and have a buy to let interest only mortgage can I offset some means of paying the capital against my profit? i.e. suppose I setup a cash ISA and pay 100 a month into it as my attempt to pay the capital back at the end of the 25yrs Is this deducted before my profit (and hence tax is calculated) as much as a repayment mortgage payments would be. Also, what would happen if in say 10 yrs I decided to use the cash ISA money for another purpose does it suddenly become taxable??, perhaps if I invest it in another property does that avoid tax on it?
With you so far. That's what I do, not monthly but sporadically.
You've lost me. You appear to be assuming something which is not in fact the case. If you have a repayment BTL mortgage, and if in one tax year you have rent coming in of (say) £6k and mortgage payments going out of £3k of which £2k is interest and £1k is capital, and if insurance, repairs, and other expenses total £1k, then your rental business raises an income tax liability on profit of £6k-£2k-£1k, not £6k-£3k-£1k. In other words the capital element of the loan repayment does not qualify as an allowable expense.
So the decision on how best to invest £1k for loan reduction is not directly affected by income tax, but solely by normal investment criteria, namely risk and return. Putting the money into an ISA is safe and provides a reasonable return at the published interest rate, tax free. Putting the money into loan overpayments in effect provides a return at the loan interest rate, also tax free, but a word of caution. Suppose the loan interest rate is 4%. Then if you pay off £1k of the loan, this means that next year the loan will cost you £40 less interest. That means that £40 more of your rental income will be taxed. This reduces the effective rate of return of investing in your debt.
No. The ISA money is 100% yours to do with as you see fit.
If I have a repayment BTL then my monthly payments are deducted before any tax is calculated. But if I have an interest only and decide to put some aside for repayment purposes are the sum of these 2 amounts deducted before tax is calculated?. Essentially I'm creating (if you like) my own repayment mortgage but not "offically". Erm, is that clearer??? :-)
INCORRECT! As RR has already explained - extremely clearly, IMO - it is only the "interest" part of the payment that is allowed to be offset against rent income when calculating tax.
Again, as RR has already said, the answer is: "NO"!
Doesn't need to be any clearer - was clear enough the first time. Whether you pay off capital via a "standard" repayment mortgage, or if you "do-it-yourself" - the answer is the same, no tax relief on capital repayments (just on interest payments).
No. You can't do that. Monthly repayments are a mixture of Capital and Interest. Only interest is allowed to set against rental income (and also other running expenses), but not Capital repayments. If you don't know what the interest element is your Bank/Building society should give you an interest certificate, if asked, for the year ended 5th April. Curiously this is still called a MIRAS5.
Isn't it enough that this poor guy now has to go back over his accounts and work out how much extra back tax he now has to pay for the incorrect calculations he may have been submitting for years?
Your reasoning is flawless. You reckon it would be an unjust anomaly for a DIY repayment scheme not to be given the same treatment as an "official" one, and indeed it would. Unfortunately for you, your premise is wrong. Only the interest portion of "official scheme" repayments is deductible, and so there is no anomaly. Interest-only payments are deductible in full because they involve no capital element, and your DIY capital repayments are not deductible because they wouldn't be if official either.
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