How to benefit from the awesome income tax advantage of remortgaging

Brett Alegre-Wood
March 16, 2017

Reduce income tax on new property investment opportunities

Investment opportunities will only benefit you if you can take advantage of them. In our last article, you met Barry. He was a property investor who wasn’t sure how to take his property portfolio to the next level. We discussed how to crush capital gains tax when you remortgage to invest.

After talking to us, Barry remortgaged his existing investment property. He took advantage of one of the best places to invest in property UK. He kept his existing cash flow positive investment property and reduced his tax liability on his new property in Manchester.

Here, you’ll learn how you can use a remortgage to reduce an income tax liability. Another reason why remortgaging could be better for investors than selling an existing property to fund new investment opportunities.

Barry’s bonus – lower income tax on his new investment property

One way in which property investors can increase their profit from rental income is to remortgage at a lower interest rate. It reduces your costs. Your profit increases, and so does your tax bill.

When Barry bought his second investment property, he did so by releasing equity from his existing property in the Midlands. He did this by remortgaging, and using the equity released as a deposit.

Barry’s new investment property cost him £90,000 – funded by £30,000 released from his first property and a £60,000 buy-to-let mortgage.

For the sake of making his story easier to follow, we’ll consider that Barry’s costs were mortgage interest only and that he’s a higher rate taxpayer:

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You can see that Barry’s tax bill on his new rental income is reduced by almost two-thirds, down to just £900. In the last column, you’ll see the effect of the new mortgage interest tax relief rules. It will phase out higher rate tax relief on buy-to-let mortgages, reducing it to the basic rate in 2020. Even so, Barry’s income tax bill is reduced by a third.

How to use remortgages to reduce the tax on your rental income

When you remortgage an investment property, you can’t offset your tax bill by the interest payments on the original property. One of the mistakes that beginner property investors make is thinking they must simply eat the cost of the remortgage. The taxman’s legitimacy might be questionable, but he’s not totally callous.

On his self-assessment, Barry couldn’t put his remortgage interest against his Midlands property (the one he remortgaged). However, it could be used against his new investment property purchase in Manchester.

The trick is to remember that it is where the money is spent which is important, not where it is raised. So, on his remortgage amount of £60,000, Barry can claim:

  • Tax relief on £30,000 against the Midland property
  • Tax relief on £30,000 against the Manchester property

What if you use remortgage proceeds for something else?

It’s only when you use the proceeds of a remortgage to purchase new property investment opportunities that you benefit from this income tax advantage. It is a big bonus for property investors. You can even benefit from this tax advantage if you are remortgaging your home to invest.

If you remortgage to release funds for a reason other than investing in property, you won’t have the same tax benefits.

Of course, a reduced tax bill is no reason to invest. Always make sure you’re investing to meet your investment objectives. But there is something very satisfying about paying less income tax while your property is growing in value.

Capital gains tax and income tax benefits – too good to be true?

Remortgaging to grow a property portfolio can help you reach your financial goals in a fraction of the time it would otherwise take you. You can release funds without paying capital gains tax. And you can reduce income tax liability by making sure you claim maximum mortgage interest tax relief.

However, if you do remortgage to build your property portfolio, you should do so sensibly. Although no capital gains tax is payable when you remortgage, it could be if you sell later. And if you buy an underperforming property, any income tax benefits will be quickly eliminated.

Before you remortgage, contact one of our team today on +44 (0)207 923 6100. We’ll discuss your options, and help you to determine if remortgaging will produce the wins you forecast. Together, we’ll determine the optimum remortgage amount. It will make sure your strategy does what it should, without disadvantaging you later.

In my next post, I'll explain how Barry’s growing portfolio was nearly caught out by another tax – inheritance tax.

Live with Passion

Brett Alegre-Wood



Beginner Property Investor, Being a Property Investor, Buy-to-let property, Capital Gains Tax, Invest in Property for Retirement, Investment, Lifetime Opportunity, Property Investment Opportunities, Property Investment Opportunity, Property Investor Strategy, Property Investor Tips, Property Investors, Remortgaging, Rental Income, Retirement, retirement income, Retirement Investing, UK Property Investor

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