Remortgage to Pay a Tax Bill

Your Comprehensive Guide for Remortgaging to Pay a Tax Bill​
​

1. Understanding Remortgaging for Tax Bills​

2. Types of Tax Bills You May Need to Pay​​

3. Eligibility for Remortgaging​

4. Advantages and Risks of Remortgaging to Pay Tax​

5. The Application Process​

6. Alternative Options if You Can’t Remortgage​

7. How a Mortgage Broker Can Help​

8. Common Questions and Misconceptions​

​
1. Understanding Remortgaging for Tax Bills
​
Remortgaging involves switching your current mortgage to a new deal, either with your existing lender or a different one. In many cases, homeowners choose to remortgage to secure a more favourable interest rate. However, you can also use this process to release equity from your property. This allows you to borrow additional funds on top of your existing mortgage balance, which can be used for various purposes, including settling a tax bill.
​
People often turn to remortgaging because large tax bills, particularly self-assessment or one-off HMRC demands, can exceed the amount you’ve saved or set aside. By using the equity in your home, you may be able to spread repayment of that tax amount over your remaining mortgage term at a potentially lower interest rate than other forms of borrowing. This can help you avoid late payment fines and maintain good standing with HMRC.
​
It’s crucial to remember that remortgaging simply reshapes how you owe money, rather than making that debt disappear. You’re turning your unpaid tax liability into a secured debt on your property, so you need to approach it with care. If you’re confident in your ability to manage the new mortgage payments, it can be a sensible route, but it’s essential to understand the pros, cons, and alternatives before deciding.
​
2. Types of Tax Bills You May Need to Pay
There are various circumstances in which you might owe a large sum of money to HMRC. Understanding the types of tax bills that commonly prompt people to consider remortgaging can help you gauge if this option is relevant to you.
​
Self-Assessment Income Tax
If you’re self-employed, have income outside PAYE, or receive money from multiple sources, you probably complete a self-assessment tax return. Tax can sometimes be underestimated, especially if business booms and you fail to set aside enough. Facing a hefty amount due in January (and potentially another payment in July) can cause a significant cash shortfall. Some people opt for remortgaging to pay off this tax obligation and spread the cost.
​
Capital Gains Tax (CGT)
Capital gains tax applies when you sell an asset (like property or shares) at a profit. The amount can be substantial, particularly if you sell a second home or buy-to-let property. If you need funds quickly to settle the CGT within HMRC’s deadlines, remortgaging could help you release the necessary money without resorting to high-interest loans.
​
Inheritance Tax
When inheriting property or other valuable assets, you might face inheritance tax obligations. You could be asset-rich but short on liquid cash. Remortgaging can raise the funds to pay inheritance tax and keep the inherited property, rather than having to sell it.
​
Unexpected HMRC Tax Demands
Sometimes HMRC discovers underpayment or errors from previous years. The resulting demand could catch you off guard, especially if it’s a large sum with a short payment window. A remortgage can provide quick access to funds, allowing you to settle the bill and avoid penalties or enforcement action.
​
3. Eligibility for Remortgaging
​
While remortgaging to pay a tax bill is a viable option for many, lenders have specific criteria you must meet:
​
Equity in Your Property
You need sufficient equity in your home to raise the amount required. Typically, lenders will allow you to borrow up to a certain loan-to-value (LTV) ratio (often 80-85% for capital-raising purposes). If you’re already at a high LTV or have minimal equity, your chances of releasing a large sum decrease.
​
Credit Score
Lenders want to see a stable, positive credit history. If you’ve managed credit well, you’re more likely to be offered favourable terms. Adverse credit histories don’t necessarily bar you from borrowing, but you may need a specialist lender and might face higher interest rates or stricter LTV limits.
​
Employment and Income
You must demonstrate you have enough income to cover the new, higher mortgage payments. This involves providing payslips, P60s, or, if you’re self-employed, tax calculations (SA302s) or accounts for the last two years. Lenders also look at existing financial commitments to ensure you can comfortably service the total debt.
​
Age and Mortgage Term
Most lenders have an upper age limit by which the mortgage must end (often 70-75). If you’re older, you might have to take a shorter mortgage term, which pushes up monthly repayments. If you’re younger, you have more term flexibility, but always weigh the long-term cost of extending debt for many years.
​
4. Advantages and Risks of Remortgaging to Pay Tax
​
Remortgaging to clear a tax bill offers several potential benefits, but it comes with risks too. Carefully review both before making a final decision.
​
Advantages

1. Potentially Lower Interest Rates: Mortgage rates are usually lower than unsecured loan or credit card rates, which helps reduce your overall interest costs.

2. Avoid Penalties from HMRC: By paying your tax bill promptly, you can avoid late payment fines and further enforcement actions.

3. Manageable Monthly Payments: Spreading the tax over your mortgage term can keep monthly outgoings more affordable.

4. Debt Consolidation: You might pay off other high-interest debts along with your tax bill, simplifying finances into one monthly payment.

5. Possible Tax Offsets for Landlords: If you’re a landlord remortgaging a buy-to-let, some (though reduced) mortgage interest relief might still apply.

​
Risks

1. Securing Debt Against Your Home: You risk losing your property if you can’t keep up with payments.

2. Long-Term Interest Costs: You could end up paying more interest overall by stretching the tax bill over many years.

3. Fees and Early Repayment Charges: Arrangement fees, valuation costs, and possible charges for leaving your current mortgage can add up.

4. Lender Restrictions: Not all lenders are comfortable lending for tax bills; you may need to approach specialist providers with higher rates.

5. Eroding Future Equity: The more you borrow now, the less equity you have for future needs.

​
5. The Application Process
​
Remortgaging for a tax bill generally follows the same steps as a standard remortgage, but with additional considerations around purpose and timing.
​
1. Calculate the Exact Amount Needed
Pin down precisely how much tax you owe, factoring in any interest or penalties. Decide if you only want to cover this liability or also consolidate other debts.
​
2. Review Your Existing Mortgage
Check if you’re within a fixed term and whether early repayment charges apply. Assess how much equity you have by estimating the current value of your home.
​
3. Consult a Mortgage Broker
A broker can assess your situation holistically, identify suitable lenders, and guide you on likely rates, fees, and timeframes.
​
4. Prepare Documentation
Gather proof of identity, address, income, and recent mortgage statements. You may also need evidence of your tax debt, such as HMRC’s calculations or assessment notices.
​
5. Submit the Application
Your broker or you (if applying directly) will fill in detailed forms about your finances and the purpose of the remortgage. The lender will conduct a credit check and review your documents.
​
6. Valuation
The lender typically arranges a valuation (sometimes a drive-by or automated model) to confirm your property’s worth. If the valuation matches expectations, it moves to final underwriting.
​
7. Mortgage Offer
After reviewing all documentation and the valuation report, the lender may issue a formal mortgage offer, detailing the interest rate, amount, and terms.
​
8. Completion
A solicitor or conveyancer handles the legal aspects, redeems your old mortgage, and finalises the new one. Any remaining funds (the equity you released) are paid to you or your solicitor, who then settles the tax bill.
​
Completing a remortgage often takes around four to six weeks, though it varies depending on your circumstances, lender turnaround times, and how promptly you submit documentation.
​
6. Alternative Options if You Can’t Remortgage
​
Not everyone qualifies for or wants to remortgage. If you fall into this category, consider these alternatives:
​
Second Charge Mortgage
Also known as a home equity loan, a second charge mortgage leaves your first mortgage intact while creating a new secured loan against your property. This can be a good option if you face heavy early repayment charges on your current mortgage but still have equity to unlock.
​
Bridging Loans
A bridging loan is a short-term, higher-interest product usually arranged swiftly. It might make sense if you need money urgently to pay HMRC but can refinance or sell a property in the near future.
​
Payment Plans with HMRC
If you reach out proactively, HMRC may allow a Time to Pay arrangement, letting you spread the tax bill over several months or more. This avoids borrowing altogether, though interest and conditions may apply.
​
Other possibilities include unsecured personal loans, credit cards (for smaller bills), or selling assets to generate cash. Evaluate the overall cost, speed, and feasibility of each before opting to remortgage.
​
7. How a Mortgage Broker Can Help
​
A mortgage broker can be invaluable when remortgaging to pay a tax bill. Rather than figuring out lender criteria on your own, you can benefit from professional insight, especially if your case is more complex. Key benefits of using a broker include:
​

• Access to Specialist Lenders: Not all lenders permit borrowing to settle tax debts, but a broker often knows which ones do.

• Detailed Advice: Brokers provide tailored advice based on your financial situation, helping you weigh up pros and cons of different approaches.

• Efficiency and Coordination: They liaise with lenders, solicitors, and valuers on your behalf, accelerating the application process and reducing administrative headaches.

• Affordability Calculations: A broker helps you understand how much you can realistically borrow and ensures you won’t overstretch your finances.

• Future Planning: The right broker relationship can extend beyond this one remortgage, guiding you to better deals down the line or helping you structure your finances to avoid similar issues in the future.

​
Ultimately, you could save a great deal of time, stress, and money by working with an expert who understands both the mortgage market and the complexities of paying a tax bill on time.
​
8. Common Questions and Misconceptions
​
Will Remortgaging Affect My Credit Score?
Applying for a remortgage involves a credit check, so expect a small, temporary dip. Over time, consistently repaying your new mortgage can improve your credit profile. Paying off the tax bill prevents potential legal action from HMRC that could harm your credit even more.
​
Can I Remortgage If I Have Bad Credit?
Adverse credit doesn’t automatically disqualify you. Specialist lenders may be open to borrowers with historic defaults or low credit scores, although rates and LTV limits could be less favourable. A broker can help identify which lenders are suitable.
​
How Much Can I Borrow?
Lenders assess how much you can borrow based on your home’s value (to maintain an acceptable LTV) and on your income and affordability. Many lenders will lend up to four or five times your annual salary, but specific circumstances, such as additional financial commitments and credit history, can raise or lower that figure. The size of your tax bill and the amount of equity you have available will help shape what’s feasible.