A Tale Of Two Btletters

[tahoma]

bulltrader, to be honest I don't know the exact lending stats re: BTL, so I've got nothing to add really.My post was more of a question than a statement.

[munimula]

I'm certain that the number of 'Amateurs' far outways the number of 'Professionals' - people who have jumped on the bandwagon in the last couple of years, hardly giving the details a second thought. And it's going to all get very messy over the next couple of years.

I think you are right, I read last week that 1/3 of BTL mortgages were taken out in 2006!!!!

[Warwick]

There is a capital gains tax allowance of 8k or so per year. If he has not claimed it for past years I believe you can when you sell the house. Might not get him out of trouble completly but can help somewhat.

No, although it is called an Annual Exemption, it cannot be carried forward. Husband and wife (or Civil Partners) each has their own, so a transfer prior to sale/disposal can be advantageous.

It is "Use it or Lose it."

[Bathsheba Everdene]

Warwick,

Thanks very much for that information -- I've often wondered about the CGT implications of BTL but not been quite sure how it all worked.

I wasn't quite sure how the 40% taper relief applied to the 40% CGT -- is it 40% of 40%, or might it cancel out the CGT?

If you had time, a simple example showing how the taper relief works would be really helpful, though perhaps not what you want to do on your Saturday morning!

BE

[karen1000]

Tale being the operative word. Nice story though.

There's two guys at my work who have 4 BTLs each, I'll call them 'Amateur' and 'Professional'. 'Professional' bought his houses slowly over the last 15 years without MEWing to pay for them and has plenty of equity. 'Amateur' bought all of his in the last 2.5 years, MEWing each to pay the deposit for the IO mortgage on the next.

The three of us were discussing house prices today. Professional is *very* bearish, thinks interest rates will be 6.5% by the end of the year and is preparing to ride out the storm. Amateur said he'd just sell when his fixed rates run out if interest rates are that high. We asked him if he'd come out up if he had to sell, 'just about' was the reply. 'Professional' then asked, 'even after capital gains?' Not a word of a lie, 'Amateur' didn't have a clue about CGT. He thought that if you MEW a property and leave only £10k equity you would only pay CGT on 10k if you sold. My jaw almost hit the floor when 'Professional' had to explain how it's actually calculated!

I'm certain that the number of 'Amateurs' far outways the number of 'Professionals' - people who have jumped on the bandwagon in the last couple of years, hardly giving the details a second thought. And it's going to all get very messy over the next couple of years.

[Bathsheba Everdene]

This thread has clearly touched a nerve in various quarters. Interesting.

BE

[dogbox]

There is no such thing as BTL being a "sound business". VP

Hmm, Id better let Cambridge Uni and all those other professional B2Ls know that VP told them a better business is making TVRs

Cmon VP, you should know better

Have you not noticed the wealth generated by property companies accross ther world?

[Warwick]

Warwick,

Thanks very much for that information -- I've often wondered about the CGT implications of BTL but not been quite sure how it all worked.

I wasn't quite sure how the 40% taper relief applied to the 40% CGT -- is it 40% of 40%, or might it cancel out the CGT?

If you had time, a simple example showing how the taper relief works would be really helpful, though perhaps not what you want to do on your Saturday morning!

BE

I have a pile of clients' Tax Returns to complete, so some light relief is always welcome.

Taper Relief is applied before the relevant CGT tax rate (10%, 20% or 40%, depending on income level) is used.

If you want to pose a hypothetical situation, give me the relevant details (purchase price, sale price, dates etc) and I shall calculate the CGT liability.

Edited January 20, 2007 by Warwick

[Bathsheba Everdene]

Warwick,

Since I'm supposed to be working, too, that's an offer I can't refuse!

How about this (feel free to alter the details and make assumptions):

Flat bought in September 2002 for £90,000

Sold in December 2006 for £120,000

Rented out to tenants from November 2002 to August 2006 at £500 pcm and assume landlord pays tax on income at 40% if that's relevant

Spent £2,000 on improvements such as new windows if that's relevant

Also, would you care to comment on the likelihood of people getting caught if they just offload their BTLs without telling HM Revenue and Customs, and what will happen to them if they do get caught (what sort of interest and penalties are likely to be applied)? And how far back can the Revenue go -- can they come after you after 10 years, say?

Thanks!

BE

[Warwick]

Warwick,

Since I'm supposed to be working, too, that's an offer I can't refuse!

How about this (feel free to alter the details and make assumptions):

Flat bought in September 2002 for £90,000

Sold in December 2006 for £120,000

Rented out to tenants from November 2002 to August 2006 at £500 pcm and assume landlord pays tax on income at 40% if that's relevant

Spent £2,000 on improvements such as new windows if that's relevant

Also, would you care to comment on the likelihood of people getting caught if they just offload their BTLs without telling HM Revenue and Customs, and what will happen to them if they do get caught (what sort of interest and penalties are likely to be applied)? And how far back can the Revenue go -- can they come after you after 10 years, say?

Thanks!

BE

Gain = £28,000 [£120,000 - £90,000 - £2000]

Less : Taper = £-2800 [ 4years = 10% x £28,000]

Net Gain = £25,200

Less : Exemption = £-8800

Taxable Gain = £16,400

Tax due @ 40% = £6560.00

The above assumes the £2000 was capital expenditure, and has not already been claimed against rental income.

HMRC can go back 20 years for fraud. Penalties can be (up to) 100% of the tax due, plus interest at the Official Rate. With access to the Land Registry databases, informers, Estate Agents etc, it is a question of when not if HMRC catch up with them. Under Self Assessment, the onus is on the taxpayer to inform HMRC of any income or gains and pay the correct amount of tax by the due date.

I had a new client come to me a few years ago and I had over 10 years of rental accounts and CGT calculations to do.

[saffron]

I know someone who has been buying up properties all over Norwich in the last 2 - 3 yrs - using the same MEW financing model. Those who have jumped on the bandwagon in recent years may well regret their investments should prices crash this year - but that remains to be seen.

But I also know 3 couples who bought homes prior to meeting each other around 2000. Then when they decided to move in together, MEW'd these to provide the deposit on the family home. Since then they have watched all 3 properties make double digit gains yoy, whilst rental has covered the mortgage repayments. These people are the real winners of the property boom, and well done to them - I wonder how many more like them there are out there? I could really kick myself for my hesitation based on my certainty that prices were about to crash...

[Bathsheba Everdene]

Warwick,

That's fantastic -- thanks very much indeed for taking the time to do that.

I had been wondering about the publication of the land registry data, and about the new tax fraud hotlines combined with jealousy if people start to sell BTL properties and talking about how much money they've made.

Good luck with the pile of real calculations!

Saffron,

Don't be too disheartened: it all depends on what happens over the next few years. We're all in the middle of a gigantic game of pass the parcel, whether we wanted to play or not, and we don't yet know who's going to get the prize at the end, and who will be left with the empty wrapping paper.

BE

[moneymad]

Gain = £28,000 [£120,000 - £90,000 - £2000]

Less : Taper = £-2800 [ 4years = 10% x £28,000]

Net Gain = £25,200

Less : Exemption = £-8800

Taxable Gain = £16,400

Tax due @ 40% = £6560.00

The above assumes the £2000 was capital expenditure, and has not already been claimed against rental income.

HMRC can go back 20 years for fraud. Penalties can be (up to) 100% of the tax due, plus interest at the Official Rate. With access to the Land Registry databases, informers, Estate Agents etc, it is a question of when not if HMRC catch up with them. Under Self Assessment, the onus is on the taxpayer to inform HMRC of any income or gains and pay the correct amount of tax by the due date.

I had a new client come to me a few years ago and I had over 10 years of rental accounts and CGT calculations to do.

I believe that anyone who can prove a "vested interest" in a property is able to apply their CGT allowance as well, i.e. if purchased with a partner.

Also properties can be transferred into a LTD company and then disposed of as business assets, with very different taper reliefs and taxation. I am not a tax adviser and this maybe slightoy off topic but a lot of people on this forum try to rubbish profits made from property simply by saying "40% CGT Nah! Nah! Nah!", yet there are many allowable expenses to reduce liability.

[Bathsheba Everdene]

That's why I asked some questions -- it's a lot more complicated than people think, and I know I don't understand it. Unfortunately virtually no newspaper or web article I've ever seen has so much as mentioned the fact that CGT applies to BTLs, let alone attempted to explain its workings. I think I've seen it mentioned once, perhaps twice, over several years. I don't know whether conveyancing solicitors or lenders explain it to BTLers when they are purchasing property, but my guess would be that they don't regard it as their responsibility.

BE

[Warwick]

I believe that anyone who can prove a "vested interest" in a property is able to apply their CGT allowance as well, i.e. if purchased with a partner.

Also properties can be transferred into a LTD company and then disposed of as business assets, with very different taper reliefs and taxation. I am not a tax adviser and this maybe slightoy off topic but a lot of people on this forum try to rubbish profits made from property simply by saying "40% CGT Nah! Nah! Nah!", yet there are many allowable expenses to reduce liability.

Briefly :

1. Yes, each (Beneficial) owner (including spouses or Civil Partners) has a separate Annual Exemption.

2. Transfer to Ltd company is not usually a good idea for CGT purposes, for the following reasons:

i). This is because the transfer will trigger a CGT liability, and Incorporation Relief is not normally available for BTLs.

ii). Companies cannot claim Taper Relief, only Indexation.

iii). BATR (Business Asset Taper Relief) will not magically become available when it was not available before.

iv). The transfer will re-set the Taper Relief "clock" -i.e. another 3 years before even 5% applies.

v). There is the possibilty of Double Taxation, as the Company will pay tax on the sale of the BTL, and more tax may be payable when that net profit needs to be extracted from the company.

Holding a BTL personally is often the better option, especially if capital appreciation is the main hope in the short term. Whether there will be any capital appreciation in the short term is another matter - unlikely in my opinion.

The above is just meant as a guide, and I strongly recommend taking professional advice related to one's specific circumstances.

Edited January 21, 2007 by Warwick

[azogar]

Briefly :

1. Yes, each (Beneficial) owner (including spouses or Civil Partners) has a separate Annual Exemption.

2. Transfer to Ltd company is not usually a good idea for CGT purposes, for the following reasons:

i). This is because the transfer will trigger a CGT liability, and Incorporation Relief is not normally available for BTLs.

ii). Companies cannot claim Taper Relief, only Indexation.

iii). BATR (Business Asset Taper Relief) will not magically become available when it was not available before.

iv). The transfer will re-set the Taper Relief "clock" -i.e. another 3 years before even 5% applies.

v). There is the possibilty of Double Taxation, as the Company will pay tax on the sale of the BTL, and more tax may be payable when that net profit needs to be extracted from the company.

Holding a BTL personally is often the better option, especially if capital appreciation is the main hope in the short term. Whether there will be any capital appreciation in the short term is another matter - unlikely in my opinion.

The above is just meant as a guide, and I strongly recommend taking professional advice related to one's specific circumstances.

Warwick - firstly a note of thanks for sharing your knowledge with us

secondly, a question (if you can spare a few minutes please)!

I think I know the answer but just need clarification

Scenario: A house has been bought from the council for a granny who has lived in it for 30 years+, the Gran has now passed away, but following 3 years of 'her' ownership, the house was signed over to the son and daugther who originally paid for it.

They now own it outright and are considering getting it mortgaged (by means of btl) to release some equity.

I presume the monies from the btl (equity release) are not subject to CGT, CGT would only apply if they sold it

Sorry if this seems a bit of a daft question, it's my wifes folks are in this position and not entirely sure

thanks PP

[Warwick]

Warwick - firstly a note of thanks for sharing your knowledge with us

secondly, a question (if you can spare a few minutes please)!

I think I know the answer but just need clarification

Scenario: A house has been bought from the council for a granny who has lived in it for 30 years+, the Gran has now passed away, but following 3 years of 'her' ownership, the house was signed over to the son and daugther who originally paid for it.

They now own it outright and are considering getting it mortgaged (by means of btl) to release some equity.

I presume the monies from the btl (equity release) are not subject to CGT, CGT would only apply if they sold it

Sorry if this seems a bit of a daft question, it's my wifes folks are in this position and not entirely sure

thanks PP

You are correct MEW is not subject to CGT.

And the BTL interest should qualify as a deduction from rental income.

[azogar]

You are correct MEW is not subject to CGT.

And the BTL interest should qualify as a deduction from rental income.

many thanks

[Guest Yeahbutnocrash]

It is impossible for a BTL to be "bearish" otherwise he would not have bought the stuff in the first place. You mean he is a bull who thought he could make a killing but has now realised he cannot make money automatically by simply buying to let and believing that everything goes up for ever. That doesn't now make him a bear. It makes him just another BTL'r who got his hands burnt and is hanging on by a thread.

Sorry to appear pedantic but it is a crucial distinction.

And what is this apparent distinction between "amateur" and "professional". The effect (for everyone else) is exactly the same. Or do you mean one attempts to earn a "living" (and fails) by it and the other merely dabbles?

VP

'Professional' bought his houses slowly over the last 15 years without MEWing to pay for them and has plenty of equity'

[Orbital]

I have no objection to people renovating disused or derelict property and selling for a profit. Nor do I resent people for being professional landlords. When will people realise there is a real problem in this country in that THERE ARE NOT ENOUGH HOUSES for the DEMAND, and this drives prices UP ! Bringing more people in, exacerbates this, and paying large amounts of money for social security to individuals for years, sometimes decades, with multiple geerations of some families on benefits is NOT A GOOD USE OF TAX REVENUE !

STOP hoping for a bad economy to bring a crash! Start campaigning for good, cheaper housing! It will affect the whole market beneficially!

You make some good points there, I particularly relate to the "STOP hoping for a bad economy to bring a crash!" point, I find it uterly bizzar that some people are cheering any bad news without realising a collapsed economy puts their own wellbeing on the line too - it affects us all. No one can buy a house when they dont have any money or a job. I are a bit more 'liberal' when it comes to freedom of movement but agree that it sickens me to know that we are paying people to be idle when there are things to be done.

Personally I think job seeking allowance should require 7.5hrs of 'work' before it is collected. Even if its just cracking rocks, people will soon think hold on, wont it be better to find something else to do... (ok im not totally serious but it makes the point !).

I do also think we need to realise that we only have finite resource, maybe we can create new towns at the expense of farm land, countrside, leisure areas etc but we cant do that for ever. There are plenty of other materials to consider from water to energy and clearly building isnt a long term solution. And besides, people want to live in certain areas, town infrastructures can only support certain numbers.

Another useful campaign that should be encouraged is rental reform, make renting more acceptable and this will help ease the pressure. Longterm I guess we have to accept population control, as above I have no probs with immigration, lets jut make it controlled. Plenty of people are leaving anyway so why not 1 in 1 out !

Edited January 22, 2007 by Orbital