40% Tax Relief on your Mortgage?

Do you have a home with a mortgage ? If so you don't need us to tell you that tax relief for mortgage interest payments isn't what it used to be. From April 1998, relief at only 10% (and even then, only on mortgages up to £30,000); from April 2000 total abolition.

Tax-efficient home loans are now a thing of the past, so what can be done about it? For most homeowners not very much. However for many owners of family companies - and for some owners of unincorporated businesses too - there is a solution. But only with some careful planning.

 Example 1

Jack lives happily with his wife, Jill, in a home which he bought some time back with the aid of a £30,000 mortgage.

Jack also owns a shareholding in a private company. He receives a good income, sufficient to make him a higher rate taxpayer.

He decides to sell some of his shares to Jill. They agree a price of £30,000.

When Jack receives his £30,000 sale proceeds, he uses them to pay off the tax-inefficient mortgage. Of course Jill doesn't happen to have a spare £30,000 lying around with which to buy the shares, so she borrows the money. And when she pays the interest on her loan, she gets tax relief at 40%.

 Example 2

Jill runs her trading business not through a private company, but as a sole trader.

Jill decides to admit Jack as a partner and he might pay her £30,000 (or whatever) for the partnership share, borrowing the money from the bank.

Jill uses the sale proceeds received by her to pay off the mortgage. And Jack would obtain tax relief, at his highest rate of tax, on the interest he pays to the bank. This is because loans to buy shares in partnerships are tax relievable.

 Key Notes -