Recently I wrote an article for this magazine explaining how it can be possible to pay off the mortgage on your home by releasing equity from your buy to let properties, and thus converting your domestic mortgage (on which the interest is not an allowable deduction) to a mortgage secured on your buy to let properties, with the interest deductible from your rental income.
The general wisdom in these matters is that mortgages on your home are to be avoided if possible, and replaced by mortgages on rental properties, precisely because of the interest being deductible on the buy to let mortgages.
I recently came across a situation, however, where the opposite was true – a mortgage secured on the family home proved more flexible and tax efficient than a mortgage on the buy to let property.
Example 1 – Buy to let mortgage
Mr and Mrs Dali jointly own a buy to let property bought with a BTL mortgage secured on the let property. The property produces a taxable rental profit of £400 a month, which is (as the law requires), assessed equally on each of them. Mrs Dali has a well paid job and is a 40% taxpayer, so she pays income tax of £960 on her half share of the profit. Mr Dali is an as yet unsuccessful artist and his share of the rent is covered by his personal allowance and he pays no tax.
They would be better off if they transferred most of Mrs Dali’s share in the property to Mr Dali, and signed a “Form 17” to require HMRC to tax them on their actual shares in the property. This will involve converting their joint ownership to a “tenancy in common”, getting agreement from their mortgage provider – and no doubt paying some form of “arrangement fee” – and depending on the size of the mortgage, there may also be some SDLT to pay. This more than swallows up the first year’s saving, but they go ahead anyway.
A couple of years later, Mr Dali becomes successful – hugely successful – as an artist, and his strange and (to some tastes) macabre paintings sell for hundreds of thousands of pounds. Mrs Dali is able to give up her job and take things easy – a fitting reward for years of toil to finance her husband’s endeavours. It would, of course, make sense to transfer the majority of the buy to let property back to Mrs Dali, with the attendant hassle and professional fees.
But what if the let property had been purchased with a mortgage secured on the family home?
Example 2 – Remortgaging of family home
The Matisses are in exactly the same situation as the Dalis were – she works hard to support his as yet unsuccessful artistic career – but they bought their BTL property by remortgaging the family home. Because there is a clear audit trail showing that the loan was used to acquire the BTL property, the interest can be deducted against the rental income.
Transferring the ownership of the let property, however, is much simpler, and only involves a declaration of trust. The mortgage provider does not have to give permission as the loan is not secured on the let property being transferred, and for the same reason there can be no question of SDLT to pay.
When Mr Matisse also hits the big time and Mrs Matisse puts her feet up, the transfer back is equally cheap and painless – simply another declaration of trust and another Form 17.
Practical Tip :
Generally speaking you are better off having mortgages on your buy to let properties rather than your home, but the tale of the Dalis and the Matisses shows that like all general principles, there are exceptions in some circumstances.
James Bailey
