Offsetting interest charged on credit cards
Question If someone used credit cards to put together a deposit for a property, wouldn't that interest also be tax-deductible?
How would you demonstrate to the IR which part was for the purposes of property, if that card was also used for normal consumer spending too?
The interest paid on credit cards is generally not a deductible expense when calculating interest paid.
This is because it is difficult to determine which part of the outstanding balance relates to the deposit for the property and which relates to consumer spending.
The Revenue also take a dim view of borrowing on credit cards in general as the level of interest charged is above what they will accept as a 'normal commercial rate'.
The borrowing can also be easily 'tainted' by using the card for other purposes.
The final reason is that it is near impossible to get a certificate of interest paid from a credit card company, so how do you prove the interest payable?
Another more technical reason is that credit card interest does not fall into the definition of 'loan interest' or 'annual payments' as far as the Revenue are concerned.
John borrows £5,000 on his credit card to use a deposit for his buy to let property.
He has an outstanding balance brought forward of £1,500, and spends £1,000 a month on his card normally, paying off £1,200 per month.
Lets assume an interest rate of 20% applies.
At the end of the month, John's balance before his payment is £7,500, and after his monthly payment is made it is £6,300.
How much of the £5,000 has been paid off?
Is it £Nil, as the payment is set off against the previously outstanding balance, or £1,200 if set against the borrowings, or some figure in between?
After a few months, it becomes impossible to define what interest relates to the borrowing and what relates to his normal activity on the card. As you can see from this case study, it will become near impossible to prove to the taxman what interest applied to what.
Therefore, as a rule of thumb, stay away from using credit cards!
Not only will you pay extortionate rates of interest, but you won't be able to claim the relief either.
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