Reduce Business Tax Using Debt – Absolutely!

There are several key ways to reduce business tax using debt.
In fact it’s crazy not to.

Keep it simple.
To keep it simple, tax authorities in the UK, US and Australia particularly (other countries have similar rules) have similar rules in regards to using debt to reduce tax.
Put simply it is not where the money is borrowed from but it’s purpose that makes it tax deductible or not. Or another way of putting it. If the money borrowed from mortgage lenders is used for taxable income producing purposes, then it’s deductible as it’s a direct cost to generating that income.

Investment Property Mortgage Vs Personal Home Mortgage Great example. The mortgage interest paid to your personal home mortgage lenders is NOT tax deductible as the property doesn’t generate income.
However, the mortgage on your Investment Property or Buy To Let property would be deductible as the property generates income (Rental Income) which you must pay tax on. Remember you can only claim the Interest portion of the mortgage lenders repayment, not the capital repayment portion. This will therefore reduce business tax using debt from the investment property. Simple yet effective. And the only proof required for this is the mortgage lenders statement.

Negative Gearing This is the term used in property particularly, where the cost of the mortgage is actually higher than the income received. Therefore the property actually COSTS you to Keep. There are several reasons you may do this. Firstly you may be expecting significant capital gains (growth in the value of the property), which offsets the cost of subsidising the property. Taxation, is the next reason. If you pay tax at the highest level then the additional deductions from the investment property can significantly reduce your tax bill.

Think logically. Let’s say you’re investment property has a mortgage which costs £10,000 per year more in interest than it receives in rent then this gets deducted from your primary income and you will receive a refund of that. So if you get taxed at a rate of 33% on your salary. You would reduce business tax using debt by at least £3,300 by claiming the interest paid to your mortgage lenders as a deduction.

Tax Deductions For Ever A good strategy for investment properties particularly while you still have a mortgage on you own home is to set the investment property up as Interest Only. Think of it this way. If you have your own home you can’t claim a tax deduction on that interest, so effectively it’s dead money from a taxation perspective. On the other hand you Investment Property interest can be claimed. If you pay your investment property as a repayment mortgage then over time the balance will reduce (which is good) but obviously the amount you can claim as a tax deduction will also reduce (bad). What to do.

Use the money you would of paid off your investment property, to reduce your personal mortgage. Therefore, you’ll own your own home sooner, clearing debt and reducing the non-deductible debt while at the same time, the investment mortgage is still at the same level. Thus, maximising your tax deductions. Don’t get confused here. Your total debt remains the same, whether you pay it off the investment property or you own home BUT you save a large amount in tax which could be fed into reducing your mortgage even faster.

You can use the our debt consolidation numbers tollsbox to establish how much all this would save you over the term of the loan. Let's face it. In business, it all comes down to the numbers.

Disclaimer:
Before we get into any real detail it’s important that you speak to your accountant to confirm these strategies to reduce business tax using debt are suitable for your circumstances as each individual situation can vary and this information is offered with the understanding that professional advice will be sought prior to implementation.

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