Additional Payments on principal amount

If additional payments are made of the pricipal on an IP Loan such as a Lump sum payment of 20K etc, to reduce interest etc, then this money is redrawn for non-investment purposes, (such as a car) will the interest amount after the money being taken out again be tax-deductable, or before the money has been taken out.

Whether the interest incurred on the extra borrowings is tax deductible is determined by the purpose of the loan. Under the circumstances described – this ‘redrawn’ interest is not deductible.

The balance of the loan (for the IP) remains tax deductible.

Does this money have to go in an off set account instead.

Placing ‘windfalls’ in an offset account is much tidier and certainly makes the ‘is this deductble interest or not question easier to answer’. Bear in mind the windfall proportionally reduces the interest bill for the period of time that it is there anyway. As such the net effect is the same.

It would make it very hard for the accountant to work out the interest amount if you redraw several times on the loan. Any comments would be greatly appreciated.

Can be done – but needs an apportioning process and very good record keeping. Also bear in mind the accountant may charge ‘extra’ for long hours spent over a calculator.