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MattW

Btl Brigade: 'it's My Pension, Innit?'

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CCC wanted to know how to minimise tax liability once mortgage was paid off. This method is one such route. Also helps to avoid IHT at a later date.

Not really feasible for many late entrants though. 300 basis points knocked off the gross yield for a repayment mortgage over 25 years at 75% LTV will eliminate much or all the returns at a stroke for many. I appreciate the interest charge will reduce in time but how many BTLers have planned for 10 or 15 years of subsidizing their investment to pay down debt for future years? Very few I'd suggest. Most just rely on the mortgage/rent spread taking care of repair obligations and other outgoings, and hope for an HPI payday come sellup time.

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Not really feasible for many late entrants though. 300 basis points knocked off the gross yield for a repayment mortgage over 25 years at 75% LTV will eliminate much or all the returns at a stroke for many. I appreciate the interest charge will reduce in time but how many BTLers have planned for 10 or 15 years of subsidizing their investment to pay down debt for future years? Very few I'd suggest. Most just rely on the mortgage/rent spread taking care of repair obligations and other outgoings, and hope for an HPI payday come sellup time.

CCC's scenario was for a non mortgaged property:

Set up shell company to hold property.

Extract capital via equity withdrawal using capital repayment mortgage. Ensure mortgage repayment is at similar level to rental income.

Drip feed extracted capital via dividend payments from the shell property company.

Rinse and repeat.

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CCC's scenario was for a non mortgaged property:

Set up shell company to hold property.

Extract capital via equity withdrawal using capital repayment mortgage. Ensure mortgage repayment is at similar level to rental income.

Drip feed extracted capital via dividend payments from the shell property company.

Rinse and repeat.

Stamp duty paid on propertys for rental?

https://www.gov.uk/stamp-duty-land-tax-rates

There are some exceptions. For example, you pay SDLT based on the new rates and bands where the property is used for:

  • a property rental business
  • a property development or resale trade
  • providing admission to visitors on a commercial basis

You'd still have to have a bank that would lend you money on the property/company business model.

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Stamp duty paid on propertys for rental?

https://www.gov.uk/stamp-duty-land-tax-rates

There are some exceptions. For example, you pay SDLT based on the new rates and bands where the property is used for:

  • a property rental business
  • a property development or resale trade
  • providing admission to visitors on a commercial basis

You'd still have to have a bank that would lend you money on the property/company business model.

There is no stamp duty as the property is never sold as it is always being remortgaged.

I'd be very surprised if there is a bank that won't give you the cash on a nearly fully paid off property.

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All well in theory, but commercial mortgage rates and LTV caps might not let you get at much of the equity over what existed at the start (for recent entrants) to allow the rent to cover the mortgage.

Works better for old-time BTLers who bought in the last crash or equity rich 'accidental' landlords who accidentally find themselves setting up shell companies and accidentally arranging commercial finance.

For most it's a pipe dream and they'd be better selling up entirely.

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Doesn't any kind of income get taxed after £10K? Or is this not the case for shares and other types of "non-work" incomes? (genuine question, forgive my ignorance).

Yes, it does. No ifs or buts.

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There is no stamp duty as the property is never sold as it is always being remortgaged.

I'd be very surprised if there is a bank that won't give you the cash on a nearly fully paid off property.

So in 2 posts we talk about non-mortgaged properties then borrowing money against them. Which, I think, makes them mortgaged properties. Why the inconsistencies?

Why trying to lump together people who have chosen to deploy their capital fully and others who are interest rate arbitrage chancers?

Edited by 8 year itch

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So in 2 posts we talk about non-mortgaged properties then borrowing money against them. Which, I think, makes them mortgaged properties. Why the inconsistencies?

Why trying to lump together people who have chosen to deploy their capital fully and others who are interest rate arbitrage chancers?

There is no inconsistency if the aim of the game is to minimise the tax liability whilst extracting capital. The mortgage is taken out so that interest payments can be offset against tax.

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There is no inconsistency if the aim of the game is to minimise the tax liability whilst extracting capital. The mortgage is taken out so that interest payments can be offset against tax.

So the tax man allows you to remortgage and deduct that interest as a business expense solely to fund payments from the business to the owner?

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Think divi income paid at a lower rate than other income, so for higher rate paying types it makes sense. The sophistry outlined above is probably not very relevant for the average BTLer.

Besides, the best way for a BTLer to avoid tax is to move into it and then sell it as a main dwelling. Makes sense to people involved in financial services, issuing debt bearing income to divert some of the tax advantages their way is the name of the game.

Edited by Joan of The Tower

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Think it's paid at a lower rate than other income, so for higher rate paying types it makes sense. The sophistry outlined above is probably not very relevant for the average BTLer.

Besides, the best way for a BTLer to avoid tax is to move into it and then sell it as a main dwelling.

Which you can't do if it's in a wrapper of a company.

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A pension is about as much as what you save as what you earn.....why in that case can't a fully paid for home you live in be as much a pension as a taxable inadequate pension obtained from a leaveraged asset often two leveraged assets got from two morgaged homes.

Who makes the best income from that?.....many others in lots of different ways.

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The BTL payoff comes over the longer term.

Very roughly, rents are about the same as what the mortgage interest payments would be, had the owner bought the place today, with a conjectural 100% mortgage*. Hence rents vary over time roughly in line with the formula market value x interest rates plus a bit of margin, and are initially less than a repayment mortgage would cost per month.

If you had bought a £100,000 house 25 years ago, it would now be worth £400,000. So its average value has been £250,000, and that's what rent would have been based on. Interest rates have averaged about 7% over that same time, so the average rent has been 7% of £250,000 - call it £18,000 a year.

If the house had been bought with a 100% interest-only mortgage, the interest cost would have been about the same as the rent initially. But throughout the whole 25-year term, it's only ever been paid on the original mortgage sum. So it would have averaged £7,000 a year. By now, the owner is paying maybe £3,000 a year in mortgage interest, but the rent is £12,000 a year. Meanwhile, he now has a £400,000 asset with only a £100,000 mortgage owing on it.

So in fact no rational landlord should ever pay off the mortgage. If he does so, the whole gross rent of £12,000 becomes subject to tax. If he leaves the mortgage in place, however, he is taxed on only the net rent, after mortgage repayments. So he's taxed on £9,000 a year, rather than £12,000.

Put another way, if he's paying the 40% marginal rate (which, if he could afford a £100k house 25 years ago, he nowadays probably is), his net letting income if he paid the mortgage off would be £7,200 (60% of £12,000). If he does not, it would be £5,400. The true cost of the mortgage is thus just £1,800 a year, or less than half a percent.

To be really well placed, what a rational landlord should do is extend the mortgage to £300,000; put the extra £200,000 down as 50% deposit on another £400,000 house; fund the rest with a further mortgage; then let this one out for £12,000 a year, too.

On a gross basis, he would then have £24,000 coming in as rent, offset by £15,000 of mortgage payments. This leaves him with exactly the same net income of £9,000 a year, and exactly the same equity (or "inflation" as I would call it) of £300,000. But he has doubled his exposure to property appreciation (good) and halved his exposure to voids and non-paying tenants (good).

The above is no doubt what a lot of landlords have done. It explains how someone who hadn't even a deposit in 1989 can now own £800,000 of houses without ever having had to fund them, bar a few quid in the initial years. It is economically completely rational to keep leveraging in this way, because if you don't, you pay more tax as rents rise. Of course, the risk you face is that interest rates rise but asset prices don't, in which case your costs go up faster than your income and you also can't sell. On a big enough scale, you're bankrupt. But only if rates rise. Asset price volatility doesn't much affect your day-to-day cash position.

And that, with apologies for the length, is why there are BTL landlords.

* There is obviously a lot of regional and sectoral variation in this, typically either risk-related or demand-related. Inner London rents are relatively lower than student housing in Durham because there's more supply in London and because the demand is from very well-paid foreigners who can easily afford the rent on a million quid flat. So they get a discount versus what can be charged to eight skint students occupying one room each and who represent a credit risk.

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So the tax man allows you to remortgage and deduct that interest as a business expense solely to fund payments from the business to the owner?

No, he doesn't. You cannot increase the mortgage, spend the equity you take out, and charge the extra interest off to tax. What you can do is extract equity and then use that to buy another property or fund another business.

Incidentally, the games hinted at above, where you put property into a company, don't work. The company has to buy the property off the individual at its current market value, and pay stamp duty on that value to register the change of title. This costs large sums of hard cash. As the individual selling the property is also the one capitalising the company to effect the buy, all this does is involve you in paying stamp duty all over again without a real change of ownership.

(It is also incidentally why flat owners who own a share of the freehold never bother to extend their original 99-year leases - there's a small but non-trivial Land Registry cost but no material benefit at all).

The other issue with company structures is that, for all the blather you hear about dodging tax via dividends, the company first pays corporation tax on its profits and you then pay tax on the dividends. Getting the money out of companies is thus pretty costly, and not really worth the hassle unless you're looking at substantial sums.

When I was self-employed and had a company, my accountants' advice was not to take the piss out of HMRC by claiming to have been paid no salary all year and taken it all as dividends. They had me pay myself about 3/4 of my previous salary, and take the rest as dividends. HMRC can and do challenge people on the grounds that your "dividends" were constructively salary and thus PAYE-able and NI-able. It was all barely worth the hassle.

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Just thinking about the incomes of rented property bought with a mortgage...

OK, so Mr. Landord buys a property to rent out with the aid of a BTL mortgage. Property is ready for a tenant, who pays a bit more than the mortgage payment so the landlord is making a profit (of sorts).

Given that many of these are bought as a pension income, it's not much of an income when there's a mortgage to pay. Factor into that repair costs over the term of the mortgage, gas safety checks and lettings agent/service charges if applicable. Once the mortgage is paid up, the property has cost a lot of money in maintenance over the years.

Wouldn't a decent pension plan be less of a long term headache, despite not paying out so brilliantly in the end?

:blink:

I'm a trustee of our company pension fund and I have this discussion on a regular basis.

It boils down to the fact that the great majority of people take it as an article of faith that property is at least a safe investment and at best a fantastic investment, where as pretty much all the investment alternatives are considered terrifyingly risky or borderline illegal.

Even on the rare occasions when I've talked to some one who recognised that all investments carry a risk, there's still a sense that the risk of a loss is more unpalatable than the prospect of a gain is attractive. Consequently there's a rationalisation that if they took a loss on property it wouldn't really be their fault, but if they took a loss on equities then their friends and family would judge them a bloody fool.

Frankly I've given up. If people want to withdraw money from a rock solid pension fund (we're about 90% funded on a liability matching basis, which given a relatively young membership is about as good as it gets) and leverage their way into BTL, predicated on capital growth, when the long term prognosis for interest rates can only be up; then that's their business.

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That was yesterday's magic formula.....the renters and their supporters require the income to pay the buyers that makes it all viable.....no or little growth means bricks end up being a liability not an asset.

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The BTL payoff comes over the longer term.

Very roughly, rents are about the same as what the mortgage interest payments would be, had the owner bought the place today, with a conjectural 100% mortgage*. Hence rents vary over time roughly in line with the formula market value x interest rates plus a bit of margin, and are initially less than a repayment mortgage would cost per month.

If you had bought a £100,000 house 25 years ago, it would now be worth £400,000. So its average value has been £250,000, and that's what rent would have been based on. Interest rates have averaged about 7% over that same time, so the average rent has been 7% of £250,000 - call it £18,000 a year.

If the house had been bought with a 100% interest-only mortgage, the interest cost would have been about the same as the rent initially. But throughout the whole 25-year term, it's only ever been paid on the original mortgage sum. So it would have averaged £7,000 a year. By now, the owner is paying maybe £3,000 a year in mortgage interest, but the rent is £12,000 a year. Meanwhile, he now has a £400,000 asset with only a £100,000 mortgage owing on it.

So in fact no rational landlord should ever pay off the mortgage. If he does so, the whole gross rent of £12,000 becomes subject to tax. If he leaves the mortgage in place, however, he is taxed on only the net rent, after mortgage repayments. So he's taxed on £9,000 a year, rather than £12,000.

Put another way, if he's paying the 40% marginal rate (which, if he could afford a £100k house 25 years ago, he nowadays probably is), his net letting income if he paid the mortgage off would be £7,200 (60% of £12,000). If he does not, it would be £5,400. The true cost of the mortgage is thus just £1,800 a year, or less than half a percent.

To be really well placed, what a rational landlord should do is extend the mortgage to £300,000; put the extra £200,000 down as 50% deposit on another £400,000 house; fund the rest with a further mortgage; then let this one out for £12,000 a year, too.

On a gross basis, he would then have £24,000 coming in as rent, offset by £15,000 of mortgage payments. This leaves him with exactly the same net income of £9,000 a year, and exactly the same equity (or "inflation" as I would call it) of £300,000. But he has doubled his exposure to property appreciation (good) and halved his exposure to voids and non-paying tenants (good).

The above is no doubt what a lot of landlords have done. It explains how someone who hadn't even a deposit in 1989 can now own £800,000 of houses without ever having had to fund them, bar a few quid in the initial years. It is economically completely rational to keep leveraging in this way, because if you don't, you pay more tax as rents rise. Of course, the risk you face is that interest rates rise but asset prices don't, in which case your costs go up faster than your income and you also can't sell. On a big enough scale, you're bankrupt. But only if rates rise. Asset price volatility doesn't much affect your day-to-day cash position.

And that, with apologies for the length, is why there are BTL landlords.

* There is obviously a lot of regional and sectoral variation in this, typically either risk-related or demand-related. Inner London rents are relatively lower than student housing in Durham because there's more supply in London and because the demand is from very well-paid foreigners who can easily afford the rent on a million quid flat. So they get a discount versus what can be charged to eight skint students occupying one room each and who represent a credit risk.

And the Wilsons lived happily ever after.

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Yes, it does. No ifs or buts.

No tax to pay IF your investments are sitting inside a tax free wrapper like an ISA. At £15,000 per year, a wealthy individual could pile £150,000 into their ISA in ten years. If they then decide to draw income from that ISA there would be no tax liability on that income.

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This is a joke, right?

So, I secure an asset using someone elses money, get someone else to pay off the debt, someone else to manage it, and at retirement (if I do it right) I'll start to get a wad of cash every month (the first 10k of which is tax free). Which bit of paying tax on it would I worry about if it hasn't cost me a penny, or an ounce of effort, in the first place?

Rinse and repeat several times and it's easy money - cash in the pocket, happy retirement.

As much as I hate it, I can see why people do it... :(

Problem round my way, Edinburgh, is that landlords can`t always get tenants, so they have a mortgage, council tax, and repairs on a property (or more than one) other than their primary residence. Rent here hasn`t moved since the late 90`s if you go direct with private landlords, add to that the hassle if you get bad tenants and BTL becomes a mugs game. There might have been a Golden Era during the "boom" where you could leverage up, buy a few properties, collect top rent, and sell out at a profit but those days are gone now IMO. Landlords who bought a long time ago and own outright will putter along if they can get tenants, but repairs and voids will eat into any "easy money".

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My rent in Gorgie Edinburgh now is 50 p.m more than in was on Easter Rd. Edinburgh in 1998, so thanks BTL guys and gals, you have allowed me to live cheaply and save for many years.

What have Edinburgh property prices done meanwhile? Presumably the cost of ownership has fallen too? If a house in Edinburgh was £100,000 in 1998 and the interest rate was 7%, and it's now worth £250,000 and the interest rate (still on £100,000) is 3%, most landlords are probably even happier than their tenants.

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Of course everyone will pile into BTL.

It doesn't matter if there are better investments (are there?). These people have already bought one house. They 'understand' property, whereas shares are volatile and scary.

With the recent pension changes it emerged that the average pension pot is relatively small - 20 or 30k or something. So they'll take that money, use it as a deposit, get a tenant in to pay the mortgage and generate a couple of hundred a month on top.

Never mind that it's the most direct transfer of wealth from the young to the old short of confiscation. Never mind that it's money for nothing (except bidding up house prices). Never mind that we're reverting to a nation of landlords and serfs. Never mind that without BTL the tenant would probably be paying the same mortgage on the same house directly. And never mind the tenant's own pension or dreams of home ownership.

BTLers kid themselves that they are 'good' landlords. They think that a new coat of paint can cover their naked greed and exploitation, and that their 'lovely' tenants are grateful for the house they've 'provided'. They think they're doing the right thing and providing for themselves in retirement.

They never have an answer when you ask them how the generation they're bleeding dry will afford a home and a BTL pension of their own.

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  • 395 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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      • Even
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      • up 5%



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