Restructuring mortgage portfolios

Our Experts Answer:

This depends on whether your question is from a banking or a tax perspective. From a banking perspective, if you can demonstrate to the bank that there is sufficient security for the overall lending in the rental properties they may be persuaded to release the mortgage security over your home. You and the company will be guarantors of the debt though so the property is still at risk even if the mortgage is lifted. A sale to a Trust with the resulting debt back to you would strengthen this if the Trust does not then mortgage the property or offer any guarantee.

But none of this manoeuvring with the bank security would lead to any further tax deductibility of interest. That's because this is determined by the use to which the borrowed money is put (to gain a nexus with income) rather than the security for lending. So your personal debt would remain personal even if secured against the rental properties. You can refinance contributed capital to the extent that the company owes you money but you can't claim interest of debt borrowed by a LTC to fund a tax free dividend from an unrealised revaluation reserve.

The option of sale to reduce the rental debt and the personal debt therefore could be wise especially if the properties yield on current market value is below the interest rate you are paying on the debt. Remember, the interest you save by avoiding your private interest burden is not taxable which makes getting rid of this debt particularly attractive.