No stamp duty on remortgages
One of the most common concerns borrowers have about remortgaging is whether stamp duty land tax (SDLT) applies. The good news is straightforward: stamp duty does not apply to remortgages. SDLT is charged only on the purchase of property or land, not on refinancing an existing mortgage. Whether you remortgage to a new lender or take a further advance from your existing lender, no stamp duty is payable.
This applies regardless of how much additional borrowing you add to the mortgage for debt consolidation purposes. Even if your new mortgage is significantly larger than the old one, no SDLT is triggered because there is no change of ownership of the property.
Mortgage interest tax relief: the residential position
For your primary residence, there is no tax relief on mortgage interest payments. The Mortgage Interest Relief at Source (MIRAS) scheme was abolished in 2000. This means that the interest you pay on your mortgage, including any additional interest resulting from debt consolidation, is not tax-deductible.
This is important to note because it means the full cost of the mortgage interest falls on you without any tax benefit. When comparing the cost of a consolidation mortgage against other forms of borrowing, all figures should be compared on a gross basis as no tax relief applies to either option for residential homeowners.
Buy-to-let and mixed-use properties
The tax position is different and more complex for buy-to-let properties. Landlords can claim tax relief on mortgage interest, but since April 2020, this relief is restricted to a basic rate tax credit of 20% rather than a full deduction against rental income. This applies to the interest on the portion of the mortgage used to purchase, improve, or repair the property.
Crucially, if a landlord remortgages a buy-to-let property and uses the additional borrowing for personal debt consolidation rather than for property-related purposes, the interest on the additional borrowing is not eligible for tax relief. Only the interest on the portion of the mortgage used for qualifying property purposes attracts the basic rate credit.
This distinction is important. If you own a buy-to-let property and are considering using it to consolidate personal debts, be aware that the interest on the consolidation portion will not be tax-deductible. Your accountant can advise on how to apportion the interest for tax purposes.
Capital Gains Tax considerations
Remortgaging your primary residence does not trigger any Capital Gains Tax (CGT) liability. CGT applies when you sell or dispose of an asset that has increased in value, and remortgaging is not considered a disposal. Your home remains your home, and no CGT arises from changing the mortgage.
However, if you own additional properties and are considering using equity from those properties for debt consolidation, the CGT position may become relevant at the point of eventual sale. The remortgage itself does not trigger CGT, but the reduced equity from a larger mortgage affects your net proceeds when you eventually sell, which could have tax planning implications. Consult a tax adviser for guidance specific to your situation.
Income tax implications of debt write-offs
If any of the debts you are consolidating were previously subject to a partial write-off or settlement at less than the full balance, there are generally no income tax implications for individuals. Unlike in some other countries, personal debt forgiveness in the UK is not typically treated as taxable income for individuals.
However, for business-related debts, the position can be different. If a trade debt or business loan was previously claimed as a deductible expense and is subsequently written off, the write-off may need to be reflected in your business accounts. This is a specialist area where your accountant's advice is essential.
Self-employed and business debt considerations
Self-employed borrowers sometimes have a mix of personal and business debts. The tax treatment of business loan interest differs from personal debt interest. Interest on borrowing for business purposes is generally tax-deductible as a business expense, provided the loan is used wholly and exclusively for the business.
If you consolidate business debts into a residential mortgage, the interest on the consolidation may lose its tax-deductible status because the borrowing is now secured against your residence rather than being used for business purposes. This can increase the effective cost of the consolidation. Before consolidating business debts into a personal mortgage, take advice from your accountant on the tax implications.
VAT on fees
Some of the fees associated with a remortgage attract VAT while others do not. Legal fees typically include VAT at 20%. Valuation fees may or may not include VAT depending on the provider. Broker fees are often subject to VAT if the broker charges a fee directly rather than being paid by commission. Lender arrangement fees do not attract VAT as financial services are generally VAT-exempt.
While VAT on fees is unlikely to be a decisive factor in your consolidation decision, it is worth being aware of the gross cost of fees when comparing options.
The impact on benefits and tax credits
Consolidating debt can affect means-tested benefits and tax credits. The additional mortgage borrowing itself does not count as income, but the resulting changes to your financial position could affect eligibility assessments for Universal Credit, Housing Benefit, Council Tax Reduction, or other means-tested support.
If you receive any means-tested benefits, consider speaking to a benefits adviser before proceeding with consolidation to understand any potential impact on your entitlements.
Seeking professional tax advice
While this guide covers the main tax considerations, individual circumstances vary and tax rules change over time. If your situation involves buy-to-let properties, business debts, complex income structures, or significant sums, professional tax advice before proceeding with consolidation is strongly recommended.
Nesto matches you with an FCA-regulated debt consolidation broker who can guide you through the financial aspects and recommend appropriate tax advisers where needed. The service is free with no obligation. Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.