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Bagehot

Higher Rate Taxpayer And Renting

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I have been renting (sold 2+ years ago) for a while now. Its been quite good. I want to continue renting for another 1-3years. I may become a higher rate taxpayer soon and therefore I will be taxed 40% of my interest on my savings. Does this mean it is now more efficent and rational to buy?

I dont want to put the money into a pension as I may want to buy one day soon. I have the maximum Cash ISA subscription and premumum bonds. Any other strategies to avoid paying 40% of my interest to taxman.

Your thought appreciated.

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Have you considered an investment strategy more orientated to Capital Gains?

If you are not already utilising your annual CGT exemption, you can "earn" (up to) £8500 tax free = £17,000 for a married couple.

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Obviously you should buy, unless it's vastly cheaper to rent in your area.

As an owner you'd be getting an implied return on your savings equivalent to mortgage payments (by that element of your savings being used in lieu of a loan) which would be tax free of course.

And let's not forget all the CG you'll stand to earn.

Que the other side of the argument.........

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Obviously you should buy, unless it's vastly cheaper to rent in your area.

As an owner you'd be getting an implied return on your savings equivalent to mortgage payments (by that element of your savings being used in lieu of a loan) which would be tax free of course.

And let's not forget all the CG you'll stand to earn.

Que the other side of the argument.........

Unless the underlying assest substantially depreciates then any saving potential you had gets wiped out along with a little more of your savings.

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Guest muttley

I have been renting (sold 2+ years ago) for a while now. Its been quite good. I want to continue renting for another 1-3years. I may become a higher rate taxpayer soon and therefore I will be taxed 40% of my interest on my savings. Does this mean it is now more efficent and rational to buy?

I dont want to put the money into a pension as I may want to buy one day soon. I have the maximum Cash ISA subscription and premumum bonds. Any other strategies to avoid paying 40% of my interest to taxman.

Your thought appreciated.

Your position hasn't deteriorated,so what difference does it make?If it is right to rent now,then it will be right to rent when your salary increases.

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Unless the underlying assest substantially depreciates then any saving potential you had gets wiped out along with a little more of your savings.

The underlyng asset only has to marginally depreciate to create substantial losses.

It is generally unwise to let tax rule your investment decisions, I have known of this for a long time and have still disregarded this to my cost time and again. One day I will learn.

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The underlyng asset only has to marginally depreciate to create substantial losses.

It is generally unwise to let tax rule your investment decisions, I have known of this for a long time and have still disregarded this to my cost time and again. One day I will learn.

If i remember Financial Planner's tax quote correctly its goes... "dont let the tax tail wag the investment dog"

Oh bagehot i presume you are aware that you pay 40% on the amount above the 20% limit?

£32,400 Pay 20%

£33,400 Pay 20% on the £32,400 and then 40% on £1000

Your not taxed at 40% for the whole £33,400, just the amount which is above the 2005-2006 allowance of £32,400

I have to keep an eye on it myself too, My savings interest this year is likely to breach £200 :lol:

Edited by theChuz

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Obviously you should buy, unless it's vastly cheaper to rent in your area.

As an owner you'd be getting an implied return on your savings equivalent to mortgage payments (by that element of your savings being used in lieu of a loan) which would be tax free of course.

And let's not forget all the CG you'll stand to earn.

Que the other side of the argument.........

Think you have posted this in 2 threads. Have also replied in the investment section.

As an owner you would incur stamp duty legal fees etc. If it were a BTL then as an HRT even if you were to obtain a yield above the mortgage rate (which currently would be a miracle) the return you made would be taxed at 40%.

The chances of making any Capital Gain would mean your having to sell the property.

So looking at the maths first as a BTL then as an owner-occupier. You buy a property for 200k and you pay 2k in stamp duty and say £500 in legal fees. Under first scenario you have no mortgage. Your opportunity cost as an HRT is the interest you would have obtained which using 4.75% as the gross rate would be £9500 less tax which equates to £5700 net.

The total cost in the first year (excluding furnishing letting agents costs etc etc) would be £8200. Let's assume you are the lucky landlord who rented on the day he completed and never had a void. You rent out at 5% yield or 10k per annum. Your gross gain is therefore £1800. If you are an HRT then you will make a maximum possible return of £1080 OR JUST OVER 0.5% PA!!! One month void and you are losing money.

Alternatively you obtain a BTL mortgage for £160000 (£40k deposit). You still have stamp and legals and probably a further £1k in valuation and arrangement fees. Your total costs so far £3500. You have tied up £40k on which you would have earned £1140 in net of tax interest. The mortgage costs 5% lets say so that is £8k. You will need to rent out the property for at least £12640 in the first year just to break even. Please also bear in mind that you cannot offset income losses.

In either of the above scenarios you will at best "wash your face" at worst lose a considerable amount of "real" money. So no financial rationale for doing it for the yield.

Turning to the Capital Gain issue - let's assume by some miracle property prices actually rise by 5% this year and next. Your 200k property is now worth £220500. You decide to sell. On the assumption you sell at that price your gross profit is £20500 less say 2% +VAT for EA's fees and another £500 for legals. Total £5681.75. The gross gain is £14818.25 of which £8500 is not subject to tax. The balance will be subject to marginal rate - in your case 40%. The total net gain is therefore £12290.95 or 3.07% pa or fractionally more than you would have got if you had stuck it all on deposit risk-free and paid 40% on the interest.

If you become owner occupier then the yield becomes academic and we will assume the mortgage/rent/interest position is neutral although rents are softening in most parts of the country.

It is then simply the gross capital gain (if there is any) you will generate. This equates to £20500 (see above) over 2 years less stamp duty (2K)legals (twice) (1K)and EA fees ((£5181)which equates to a net return of £12319 or 3.1% per annum!!! Less than the yield on FTSE100.

WHY would you do it?

Edited by foxytrader

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Think you have posted this in 2 threads. Have also replied in the investment section.

As an owner you would incur stamp duty legal fees etc. If it were a BTL then as an HRT even if you were to obtain a yield above the mortgage rate (which currently would be a miracle) the return you made would be taxed at 40%.

The chances of making any Capital Gain would mean your having to sell the property.

So looking at the maths first as a BTL then as an owner-occupier. You buy a property for 200k and you pay 2k in stamp duty and say £500 in legal fees. Under first scenario you have no mortgage. Your opportunity cost as an HRT is the interest you would have obtained which using 4.75% as the gross rate would be £9500 less tax which equates to £5700 net.

The total cost in the first year (excluding furnishing letting agents costs etc etc) would be £8200. Let's assume you are the lucky landlord who rented on the day he completed and never had a void. You rent out at 5% yield or 10k per annum. Your gross gain is therefore £1800. If you are an HRT then you will make a maximum possible return of £1080 OR JUST OVER 0.5% PA!!! One month void and you are losing money.

Alternatively you obtain a BTL mortgage for £160000 (£40k deposit). You still have stamp and legals and probably a further £1k in valuation and arrangement fees. Your total costs so far £3500. You have tied up £40k on which you would have earned £1140 in net of tax interest. The mortgage costs 5% lets say so that is £8k. You will need to rent out the property for at least £12640 in the first year just to break even. Please also bear in mind that you cannot offset income losses.

In either of the above scenarios you will at best "wash your face" at worst lose a considerable amount of "real" money. So no financial rationale for doing it for the yield.

Turning to the Capital Gain issue - let's assume by some miracle property prices actually rise by 5% this year and next. Your 200k property is now worth £220500. You decide to sell. On the assumption you sell at that price your gross profit is £20500 less say 2% +VAT for EA's fees and another £500 for legals. Total £5681.75. The gross gain is £14818.25 of which £8500 is not subject to tax. The balance will be subject to marginal rate - in your case 40%. The total net gain is therefore £12290.95 or 3.07% pa or fractionally more than you would have got if you had stuck it all on deposit risk-free and paid 40% on the interest.

If you become owner occupier then the yield becomes academic and we will assume the mortgage/rent/interest position is neutral although rents are softening in most parts of the country.

It is then simply the gross capital gain (if there is any) you will generate. This equates to £20500 (see above) over 2 years less stamp duty (2K)legals (twice) (1K)and EA fees ((£5181)which equates to a net return of £12319 or 3.1% per annum!!! Less than the yield on FTSE100.

WHY would you do it?

Erm...Because of the trend of the past 8 years under Labour?

From reducing MIRAS in 1997 - (this was a tax break to encourage ordinary people to own just one home of thier own). They then scrapped it completely in 2000.

I am not going through all the policy changes from then to now, SIPPS etc - I have covered it in other posts - but who knows what further massive changes they have up thier sleeve in the coming 4 years including increasing subsidies 'to help' key workers, (which is another jackpot to landlords/property owners).

Any subsidy schemes to key workers or other 'poor' groups are paid via increased non-keyworker taxes of course, reducing thier income and increasing the pool of long term tenants in insecure employment. They will be hit with a double whammy effect of higher capital values for a first home and lower real income (after taxes) and more expensive credit as they help pay the costs of thier fellow keyworkers mortgages.

There are 4 years left of the Labour term I believe. Will the trend continue?

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Erm...Because of the trend of the past 8 years under Labour?

From reducing MIRAS in 1997 - (this was a tax break to encourage ordinary people to own just one home of thier own). They then scrapped it completely in 2000.

I am not going through all the policy changes from then to now, SIPPS etc - I have covered it in other posts - but who knows what further massive changes they have up thier sleeve in the coming 4 years including increasing subsidies 'to help' key workers, (which is another jackpot to landlords/property owners).

Any subsidy schemes to key workers or other 'poor' groups are paid via increased non-keyworker taxes of course, reducing thier income and increasing the pool of long term tenants in insecure employment. They will be hit with a double whammy effect of higher capital values for a first home and lower real income (after taxes) and more expensive credit as they help pay the costs of thier fellow keyworkers mortgages.

There are 4 years left of the Labour term I believe. Will the trend continue?

Personally place a lot less of the HPI at the foot of the Labour government than you do. Also legislation like Housing Act 2004 and new HMO rules will start to make a lot of BTL even less attractive. Large properties become less attractive just as the number of 2 bed properties rockets.

Think the investing public take a long time to change direction but when they do they tend to go a long way - the supertanker theory. It's all a game of musical chairs - the stock market has had a fantastic run for 3 years but only astute (generally institutional) investors have benefitted. Punters are still licking TMT wounds or pointing to their "profits" on BTL's. Exactly the same is happening now. Astute property investors have been getting out for the last 3 years - the general public will get buried in the next 3-5 years although the sharpest operators will be picking up bargains from maybe early 2006.

Keyworker subsidies are unattractive (according to the take-up rates) and amount to peanuts relative to the market.

Greed and fear. Twas ever thus.

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I have been renting (sold 2+ years ago) for a while now. Its been quite good. I want to continue renting for another 1-3years. I may become a higher rate taxpayer soon and therefore I will be taxed 40% of my interest on my savings. Does this mean it is now more efficent and rational to buy?

Which is the lower figure:

1. the interest only mortgage payments on the property or

2. the rent on that property less the amount of interest you'd get on your savings, after tax?

It's worth working out the sum for yourself, including stamp duty, legal, survey and moving fees in the mortgage. It does depend quite heavily on the size of your deposit and the location/type of property you want to buy.

Looking at rents and property prices in London, it's easy to calculate that a potential FTB with only a small deposit, looking for a 2-bed flat or smaller, would be better off renting. For a HRT with a big deposit looking for a family house, it might work out cheaper to buy.

The problem is that these sums are here-and-now calculations, which is why I'd agree that you shouldn't base your decisions entirely on tax considerations.

What will happen in the future? Are interest rates about to go up? Property prices about to go down?

Edited by geranium

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Thanks to evryone for their replies. I think its worth hanging on for one more year even if I pay 40% tax on the C £33K+ element of my income. Which is what I will do.

However, what I was keen to find out was whether there is anything like the cash element of ISAs or Premimum Bonds worthy of investment. I will consider equity ISA but think the risk is too large if investing for only <1year.

Thanks

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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