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Tax Relief On Buy To Let Mortgage Interest.


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Venger, in my view the government will use htb and other props to limit the rate of fall of house prices overall, and even promote a boom for the 2020 election. I still see the bottom of the market being post 2025, sadly. Happily some people who decided to become my enemies by treating me like dirt for not supporting their hugely leveraged debt gambles, will be severely hurt by this. No pity.

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I had no idea we were so influential :lol:

Mark Alexander 08/07/2015 at 19:39

I can but wonder how this decision came about.

I reckon the political discussions went something along these lines ………

Chancellor – Where can we raise another £1 billion a year in tax?

MP – What about landlords, they are the biggest beneficiaries of the ultra low interest rates

Chancellor – But what about when rates go back up?

MP – Well let’s be honest with each other, that’s not likely for a very long time!

Chancellor – OK, fair enough, and the BoE are concerned that £200 billion has been lent to landlords too.

Many MP’s – Yes agreed, but we are a conservative government, surely we can’t tax the rich can we?

Chancellor – Ah but what about if we phase it in gradually by gently reducing the tax breaks in BTL mortgage interest like the loony lefties have been suggesting. The difference is that we will only go half way max, surely the landlords will still vote for us at the next election on that basis?

More MP’s – Yes that makes sense, they’d have been much worse off if the lefties had got in because they are nothing more that a puppet for the likes of Shelter and the House Price Crash idiots when it comes to landlords are they?

PM and Chancellor – OK, agreed?

Most MP’s who are not Landlords – Agreed!
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Would you like to re-run those numbers with a 2% rise in interest rates.

By 2020? Fat chance!

I would have thought the increased risk weightings for BTL in the latest Basel proposal could easily cause a 2% rise without any movement in the base rate?

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As best I can understand the term "given as a basic rate tax reduction" what I get is this, for a BTL paying 45% on rental income via self-assessment. I'm struggling to believe that I have this right, but I can't see another way to interpret it.

I%2Bmean%2Breally.png

If you're making good money from other income and operating a profitable BTL, you'll be paying the tax man to carry the investment.

Thanks - helped me understand.

Worse than that surely because of the 'wear and tear' adjustment too. Suspect real 'wear and tear' incurred is about half that claimed.

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And what if this material change in his financial circumstances triggers repossession clauses in his mortgages?

They have a very strange existence - for such an outwardly successful pair they have odd behaviours, such as the £300k arrears they'd built up in 2009. I imagine they have quite a bit of equity still, even though it pains me to say it- so they'll likely walk away with millions even with a 20% reduction in property values (say).

That said:

  • They've been trying to sell for years, and today's announcement only makes it less likely that they'll be able to offload the portfolio.
  • If there are any forced repossessions then they might get less than 70% of their optimistic valuation, which may well wipe them out.
  • They will have created a lifestyle that takes low millions to run and which will have at least some fixed costs (racehorse feed, say) - even halving their income would be difficult.
  • Burberry shares might take a hit.

They got in early so might be okay - but those that followed the model (which 'anyone with half a brain could do') will be the victims. I have a friend from school who went into BTL in a big way from 2008. Speaking with him last year he makes about 20% profit. Looking at the numbers he'll be wiped out by 2019. Not a popular chap all told, so I don't think there will be tears.

I've run a few businesses (proper ones, not speculative ones) and one of the advice I had in the early days was 'be wary of government funding/largess - so long as it continues everything will be great, but one day they'll change their rules, and when that happens you'll be bu****ed overnight'. I was reminded of that today.

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Venger, in my view the government will use htb and other props to limit the rate of fall of house prices overall, and even promote a boom for the 2020 election. I still see the bottom of the market being post 2025, sadly. Happily some people who decided to become my enemies by treating me like dirt for not supporting their hugely leveraged debt gambles, will be severely hurt by this. No pity.

2025 It could well be, but I'm going to allow myself to remain... hpc rapid deludedly optimistic? After all, markets have gone extreme in one direction. Maybe for isolated opportunity that won't be reflected in wider indicies, such as a house I would have bought in 2012 during a market cooling (hard to believe it now - but it was cooling then - inheritor slashed it to sell, and a FTB got it for a chunk below that with an offer.)

Although I haven’t crunched the figures I think you understanding is correct.

Portfolio landlords have been well and truly shafted and there is going to be a knock on effect as Buy To Let and commercial lenders are going to require larger rental coverage multiples so going to harder to get finance for new purchases or even refinance.

All we need now is a rise in interest rates and there will be plenty of repossessions on the market!

PropertyTribes thread as they try and wrap their heads around it

http://www.propertytribes.com/summer-emergency-budget-2015-landlord-and-property-perspective-t-127621205-5.html

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Mark Alexander 08/07/2015 at 21:10

OK, so now we are all pretty clear on what the implications are, what next?

I am in the process of remortgaging several of my properties to 85% fixed for 5 years but now I must re-think this.

Should I sell up? Maybe, but the CGT is horrendous!

Maybe I should remortgage to the max and wait for distressed sellers? I’m sure there will be plenty of these and the LPA receivers may well get very busy come 2017 and they won’t be wanting to hold highly leveraged assets that are losing money but still incurring tax liabilities for too long! Will we see early 90’s style fire sale opportunities? If so, cash will be king!

Will lenders change their notional rates to reflect the new cashflow issues? If they do borrowing will get tougher, and as we know, this drives property values down too.

Will mortgage brokers see another crash in applications?

Will BTL purchases in progress be aborted? If so this will hit estate agents and developers.

Will developers be able to continue to build if they lose the BTL off plan speculators which they are so reliant upon to get funding these days?

On balance, I think all those who have huge amounts of cash or the ability to raise it quickly are in for some rich pickings, leaving the rest with major difficulties to endure.

Maybe I will refinance at high gearing and a long term fixed after all?

What are your thoughts?
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Mark Alexander 08/07/2015 at 21:32

Reply to the comment left by “james pearce” at “08/07/2015 – 21:23“:

What’s the point of holding a depreciating asset?

Better to hold if if you have maximised the cheap cash you can get out of it surely, especially if you can at least break even, and then use that cash to swoop into a buying frenzie when values bottom out?

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Maybe I should remortgage to the max and wait for distressed sellers? I’m sure there will be plenty of these and the LPA receivers may well get very busy come 2017 and they won’t be wanting to hold highly leveraged assets that are losing money but still incurring tax liabilities for too long! Will we see early 90’s style fire sale opportunities? If so, cash will be king!

So they want a HPC now? Classic :D

Waiting for distressed sellers with lots of cash in the bank is the standard here. Come on over, join the club :P

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So they want a HPC now? Classic :D

Waiting for distressed sellers with lots of cash in the bank is the standard here. Come on over, join the club :P

It's very amusing. It's like he thinks that the lenders he wishes to refinance with won't be having the same thoughts about house prices and will be happy to lend him ridiculously large sums at low rates so that he has the cash on hand to double down. Do we think lenders are currently likely to be that silly?

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From propertytribes :-

Portfolio landlords have been well and truly shafted and there is going to be a knock on effect as Buy To Let and commercial lenders are going to require larger rental coverage multiples so going to harder to get finance for new purchases or even refinance.

All we need now is a rise in interest rates and there will be plenty of repossessions on the market!

I love LOVE LOVE LOVE reading this. BTL was a crappy model to begin with - speculative business that required asset value growth to really make any money from.

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interesting though experiment on property tribes:

"What if

rent income £20k

interest £25k

Profit -£5k"

Their interpretation is no tax to pay as they made a loss...

But for a higher rate taxpayer as far as I can tell it would be:

tax before interest tax relief = 20k x 40% = £8k

interest tax relief = £25k x 20% = £5k

Residual tax to pay = £3k...

as well as having to cover the loss...

bit galling to have to pay tax on a loss...

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This is why LL could outbid OO, the OO pays say £1000 on a mortgage, the LL only pays £600 for the same mortgage because of the tax relief, so the LL can pay the equivalent of £1200 because the real cost is way less than £700 which will be more than covered by the £1000 paid as rent by the outbid OO.

This is not the only reason that they can outbid OO. Under MMR house buyers are stress tested at 7% interest rates on their repayments. BTL are only stressed at 5% by most lenders. This is not much higher than current interest rates.

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I wonder if Osborne is taking amateur BTL empires out of the equation to make the business more attractive for large scale institutional landlords?

Possibly. It could force a fair few BTL speculators into other avenues to make money.

Maybe this is a sign that they are starting to take the UK productivity problem seriously now.

This is reinforced by the fact that wealthy, proper landlords who are using their own capital will be unaffected. It is the highly geared, inside track type chancers who are going to be ruined.

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This is not the only reason that they can outbid OO. Under MMR house buyers are stress tested at 7% interest rates on their repayments. BTL are only stressed at 5% by most lenders. This is not much higher than current interest rates.

Interesting looking back at an old HPC thread from 2007 discussing the impact of MIRAS on OO purchase decisions in the 1970s and the 1980s together with the effect of its gradual removal from 1988 to 2000. Back then many were predicting the same would happen to BTL mortgages. The surprise is it has taken so long. Looking at the cries of pain from Landlord VIs you do wonder if the main attraction of it for some investors was the tax relief rather than the business itself. No doubt the Chancellors decision is going to change the ROI sums for many.

Also worth noting is the big hike in insurance premium tax from 6% to 9.5% which received little attention from the media. That is over a 50% increase. While the raised IPT will impact everyone with insurance it is going to hit landlords with multiple properties particularly hard.

You don't have to be a weatherman to see which way the wind is blowing.

Edited by stormymonday_2011
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From propertytribes :-

I love LOVE LOVE LOVE reading this. BTL was a crappy model to begin with - speculative business that required asset value growth to really make any money from.

I'm trying to resist posting, but :lol:

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interesting though experiment on property tribes:

"What if

rent income £20k

interest £25k

Profit -£5k"

Their interpretation is no tax to pay as they made a loss...

But for a higher rate taxpayer as far as I can tell it would be:

tax before interest tax relief = 20k x 40% = £8k

interest tax relief = £25k x 20% = £5k

Residual tax to pay = £3k...

as well as having to cover the loss...

bit galling to have to pay tax on a loss...

Yeah, that's how I understand it too. There's an actual, cashflow loss but, in terms of HMRC, there's a paper profit i.e. 20k income, 12.5k interest (actual is £25k but HMRC only recognises half of it), so £7.5k profit @ 40% = 3k. Same result as you though you probably expressed it better. Another aspect of this is that in the above scenario, the actual loss and the tax bill would presumably have to be paid for from the landlord's post-tax employee (or other source of) income. It couldn't be offest against their employee tax bill.

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The one side of this that no one has considered yet is the effect of current legislation on puting an individual 'property' into a company held folder. There were acts enabled in 2012,13 that will already tax houses held in this manner. Not least the 15% SDLT and ongoing extra taxes. There are legal sites out there dealing with this issue, that'll explain better than I could.

Ergo, no fast move to a limited company for half the rented stuff in London I'd've thought.

Plus, I doubt anyone here doesn't know this : but only your main residence is exempt from CGT upon sale. A few accidental landlords could be stuffed by that soon too. I also know that you have in the past been able to bridge for 2 or 3 years a domestic move and not be stuffed for CGT.

Lastly I seem to remember that our previous Labour Faux Tory Chancellor scythed the CGT on BTLs upon disposal from 40% to something like 12 or 15%. It may even have gone back to something like 25% under the present or last government.

All in all positive news, but almost certainly a green flag for institutional investors to move in soon and clear up. If not a crash over the next 3 years, then certainly a dip on the horizon.

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  • 442 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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