Tax Relief On Buy To Let Mortgage Interest.

[Killer Bunny]

No, thank you for sharing. If I knew your twitter handle I'd have HTed you

[pipllman]

remember to include the early redemption penalty for settling the mortgage before the end of its fixed term in your sums

see my post #1756

even if it only comes to a couple of £k per hundred £k borrowed, it is enough to cause another grey hair to appear on some landlords' scalps

[Exiled Canadian]

Enjoy the pdf at the link, Death by HPI. My feelings will survive a confrontation with the discovery that I'm made an error, but it looks right to me.

Thinking this through the buy, mew and then buy again strategy is like a drug for a serial BTLer, and a drug that it's impossible to get off. Effectively every time their portfolio benefits from HPI they use the gain to pump more money into the market.

The only way to actually liquidate a gain is to allow HPI to increase the value of the portfolio without buying any more properties so that when the portfolio is liquidated all the debt and CGT can be repaid.

I doubt lenders take any account of deferred tax liabilites implicit in a MEW transaction as their 1st charge will trump the CGT liability. I wonder how many BTL landlords thought this through in sufficient depth to make some form of provision for the deferred CGT that will chrystalise on exit?

[SamuearlJackson]

Also, the modelled BTLer may have also had to pay SDLT upon purchase (depending on the purchase price of course), further reducing the profit.

[Bland Unsight]

Enjoy the pdf at the link, Death by HPI. My feelings will survive a confrontation with the discovery that I'm made an error, but it looks right to me.

Amateurishly I have failed to tell the reader that R is the rate of CGT that applies. You can work it out from the context, but it's generally held to be good practice when writing up a mathematical model to tell the reader which quantities the symbols employed represent. (#^.^#)

I'll patch it and re-post.

[Bland Unsight]

Thinking this through the buy, mew and then buy again strategy is like a drug for a serial BTLer, and a drug that it's impossible to get off. Effectively every time their portfolio benefits from HPI they use the gain to pump more money into the market.

Exactly, interest-only mortgage financed buy-to-let investment is an HPI machine.

At a time of falling mortgage interest rates enabling the investors to pay more for the properties using static rents it will just spew new credit money into the housing market pulling asset prices ever further away from a sustainable relationship with earnings. It's absolutely totally f**cking stupid. And yet you have well paid Oxford educated w@nkers like Simon Jack on Radio 4 talking it up as a rational destination for your defined contribution pension pot.

The fact that we are doing this not fully seven years on from the collapse of Lehman Brothers is beyond f**king ridiculous. The banks are completely unreformed. A UK mortgage bank is simply a large organisation with an ageing computer system that lends too much money against property and then explodes. The banks have learned nothing from the run up to 2007. Nothing. Their improved conduct in the owner-occupied sector rests entirely on the fact that they have been made to behave.

We are still in the UK property bubble that began inflating in about 1997. It is a long way down to the bottom from here.

[pipllman]

Thinking this through the buy, mew and then buy again strategy is like a drug for a serial BTLer, and a drug that it's impossible to get off. Effectively every time their portfolio benefits from HPI they use the gain to pump more money into the market.

The only way to actually liquidate a gain is to allow HPI to increase the value of the portfolio without buying any more properties so that when the portfolio is liquidated all the debt and CGT can be repaid.

I doubt lenders take any account of deferred tax liabilites implicit in a MEW transaction as their 1st charge will trump the CGT liability. I wonder how many BTL landlords thought this through in sufficient depth to make some form of provision for the deferred CGT that will chrystalise on exit?

unless (until) the portfolio is insolvent and put into the hands of the official receiver or similar

in that case, where assets are sold and a CGT liability arises, the tax liability is top of the pecking order and trumps any first charge on the asset

[Exiled Canadian]

unless (until) the portfolio is insolvent and put into the hands of the official receiver or similar

in that case, where assets are sold and a CGT liability arises, the tax liability is top of the pecking order and trumps any first charge on the asset

I think that the law has changed in that respect and a fixed charge beats the taxman - however I'm no expert in insolvency, and even less of one in personal insolvency, so I could well be mistaken.

[frederico]

There are plenty of people who still believe all this will carry on forever.

[winkie]

I thought lenders had a limit as to how may BTL properties they would lend against to one borrower.....for reasons already mentioned.....most only have one to four.....but that is still four potential homes taken out of the market that would have ordinarily been sold to first or second time buyers...

[pipllman]

I think that the law has changed in that respect and a fixed charge beats the taxman - however I'm no expert in insolvency, and even less of one in personal insolvency, so I could well be mistaken.

Generally HMRC is no longer a preferred creditor. However, in the situation I outlined: where assets are sold by the receiver and those sales result in a CGT liability, HMRC gets that tax first

From

http://www.hmrc.gov.uk/manuals/insmanual/ins2405.htm

with my bold

When a trustee disposes of a bankrupt’s assets any chargeable gain arising from the disposal

• is subject to Capital Gains Tax assessable on and recoverable from the trustee
• constitutes a first charge on the realisation of the assets. It is payable by the trustee as an expense of the bankruptcy and before claimable debts (for example the sale of property, rents and gross interest received. This also applies to PAYE/NIC when a trustee continues the business).

[Exiled Canadian]

Generally HMRC is no longer a preferred creditor. However, in the situation I outlined: where assets are sold by the receiver and those sales result in a CGT liability, HMRC gets that tax first

From

http://www.hmrc.gov.uk/manuals/insmanual/ins2405.htm

with my bold

When a trustee disposes of a bankrupt’s assets any chargeable gain arising from the disposal

• is subject to Capital Gains Tax assessable on and recoverable from the trustee
• constitutes a first charge on the realisation of the assets. It is payable by the trustee as an expense of the bankruptcy and before claimable debts (for example the sale of property, rents and gross interest received. This also applies to PAYE/NIC when a trustee continues the business).

Apologies - you're clearly all over this.

[Bland Unsight]

There are plenty of people who still believe all this will carry on forever.

That's true but if nobody will extend them credit enabling them to act on their beliefs then their beliefs will stay in their heads and house prices will collapse to a level consistent with what MMR constrained owner-occupiers can afford, which is at least 40% down from here.

It's "If wishes were horses, then beggars would ride" not "Because wishes are interchangeable with actual horses, beggars do ride"

[pipllman]

Apologies - you're clearly all over this.

not really, it is just something I read!

what it might mean for BTLers is that lenders should be less likely to force them into insolvency because, if they do, any charges the lender has over the property are diluted by this very specific scenario in which HMRC takes priority

if the BTLer can survive without insolvency proceedings starting, HMRC is just a normal creditor and secured lenders would have more chance of recovering their monies

however, on the flip side, it does mean that HMRC should be more likely to force an asset rich BTLer into insolvency if it is owed money as, by doing so, it basically trumps any secured lenders when it comes to getting money from the asset sales

[Bland Unsight]

I clocked this from Property118 this morning, too good not to share.

Gentle Landlord, 25/07/2015 at 16:43

Does anyone remember, when George Osborne visited his local HMRC office in December 2013, staff at HMRC showed him a tax return where it showed, property investor received more than £150k income but he managed to offset, all his income by virtue of, Interest Deduction, Wear and Tear Allowance, Repairs and Professional Fees, end result was no tax payable.

The staff at HMRC covered personal details of that Tax payer and showed him rest of return as a result Osborne was left shell-shocked and everyone expected that, he may attack, Buy TO LET investors in December 2013 budget speech but he did not do so.

Furthermore he did not mention anything in April 2014, December 2014, April 2015 but the minute they got into power again he has changed his tune.

Would you agree that, his action could be construed as fraudulent as his party has obtained votes by deception?

Don't worry Gentle Landlord, the ladies and gentlemen of HMRC are gentle too.

This is a big part of it as well, as the Gentle Landlord indicates some portfolio landlords apparently very consciously keep the LTV in the portfolio as high as possible in order to ensure that they show little or no taxable income. The portfolio is a capital gain generating machine, and money to pay for the Range Rover lease can be extracted via re-mortgaging. The re-mortgaging is not a disposal so no CGT arises.

[Exiled Canadian]

not really, it is just something I read!

what it might mean for BTLers is that lenders should be less likely to force them into insolvency because, if they do, any charges the lender has over the property are diluted by this very specific scenario in which HMRC takes priority

if the BTLer can survive without insolvency proceedings starting, HMRC is just a normal creditor and secured lenders would have more chance of recovering their monies

however, on the flip side, it does mean that HMRC should be more likely to force an asset rich BTLer into insolvency if it is owed money as, by doing so, it basically trumps any secured lenders when it comes to getting money from the asset sales

I guess the problem there is that the CGT liability won't chrystalise until the property is sold, and even then won't be due for payment until the January following the end of the fiscal year in which the sale took place. Hence HMRC may be late to the party is the lender manages to force a swift realisation of the portfolio outside of a formal process.

[Exiled Canadian]

I clocked this from Property118 this morning, too good not to share.

Gentle Landlord, 25/07/2015 at 16:43

Don't worry Gentle Landlord, the ladies and gentlemen of HMRC are gentle too.

This is a big part of it as well, as the Gentle Landlord indicates some portfolio landlords apparently very consciously keep the LTV in the portfolio as high as possible in order to ensure that they show little or no taxable income. The portfolio is a capital gain generating machine, and money to pay for the Range Rover lease can be extracted via re-mortgaging. The re-mortgaging is not a disposal so no CGT arises.

That really is at the level of "it's not fair - someone's taken away my magic money machine."

[pipllman]

I would love to see the video clip of the HMRC office visit alluded to by Gentle Landlord as per #1781

[Byron]

But, but, but, but,

Fergus said quite clearly that house prices double every seven years,

........................................................Oh SH@T

[Guest_growlers_*]

Amateurishly I have failed to tell the reader that R is the rate of CGT that applies. You can work it out from the context, but it's generally held to be good practice when writing up a mathematical model to tell the reader which quantities the symbols employed represent. (#^.^#)

I'll patch it and re-post.

Thanks for that, wish my algebra was any good.

I plugged the formula into my spreadsheet and reassuring the equivalent numbers came out (difference is due to the £10K allowance).

I'd still argue that capital gains in this situation isn't a huge deal: 75% LTV and under Landlord fine. Even for 85% LTV you have to be sitting on 2.5 HPI before cash flow issues arise.

Would be interesting to see landlord population broken down by LTV and HPI they are sitting on but I suspect the hyper leveraged, high HPI population is small.

[XswampyX]

Something is wrong. On the last house bought for £450,000 and then sold for £500,000 in the 65% LTV. You walked away with £163,000?

[Bland Unsight]

Thanks for that, wish my algebra was any good.

I plugged the formula into my spreadsheet and reassuring the equivalent numbers came out (difference is due to the £10K allowance).

I'd still argue that capital gains in this situation isn't a huge deal: 75% LTV and under Landlord fine. Even for 85% LTV you have to be sitting on 2.5 HPI before cash flow issues arise.

Would be interesting to see landlord population broken down by LTV and HPI they are sitting on but I suspect the hyper leveraged, high HPI population is small.

There is an alternative perspective which is that:

• if your investment is a capital gain play and your gain at the end disappears in a puff of CGT, then what you actually are is a crap bank quisling preying on people who work, (BTW, for guests from Property118, that's why Osborne is wiping his doughy @rse with your stupid letters, you cretins )
• when your crap bank's central bank is publicly stress testing for a 35% correction, you'd better be solid with an LTV of 110% because when dinner is served you are eating that bucket of shit, one way or another

Of course, I am talking my book. Which is decidedly short crap houses at 12x local median earnings. YMMV.

Edited July 26, 2015 by bland unsight

[Byron]

If I go bankrupt, will my Boss find out?

I work for a religious order and they insist on utter respectability and won't be at all happy.

[XswampyX]

Who GOD?

I think he'll find out!

[Guest_growlers_*]

Something is wrong. On the last house bought for £450,000 and then sold for £500,000 in the 65% LTV. You walked away with £163,000?

You had me worried.

Formula is ok - remember it is cash flow no accounting profit.