SearchPay off NZ debt?
Wendy asks:
(updated on Sunday, June 14th 2015)
Should we re-mortgage our UK property to pay off our NZ debt on our family trust? Cashflow wise it makes sense as our UK property is making a profit. We could re-mortgage and have the UK rental income cover the increased mortgage and expenses. We are declaring the UK income here and pay tax to NZ IRD. If we re-mortgaged we would be paying less tax as we would be making less profit. Bringing the money across enables us to pay a chunk of our NZ mortgage held by our family trust. Then repayments could be changed from interest only to table repayment loan for the same repayment amount. Can you please explain the tax implications of doing this? I was told that the interest on the additional sum of money we borrow could not be tax deductible on the UK rental income.
Our Experts Answer:
To answer this I assume the debt in the trust is personal bearing interest that is non deductible. Refinancing the UK property does not necessarily make the interest deductible simply be securing debt against the income earning asset. If the borrowed money is not used to derive taxable income, as would be the case here, the interest is not deductible, i.e. it's not the security for the loan that matters but what the money was used for that determines the deductibility. More foreign debt also exposes you to the unpredictability of taxable gains on movements in the loan amount when expressed in NZ dollars as a result of changes in the exchange rate. There are also non-resident withholding taxes to consider and approved issuer levies on the interest being paid to the foreign bank. You would also be buying the kiwi dollars with borrowed pounds at a time when the kiwi is at all time highs. I think the snake is longer than the ladder on this one.
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