Tax Plan For New Buy-To-Let

Tax Plan For New Buy-To-Let

15:13 PM, 17th January 2017, About 8 years ago 10

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Are you and your spouse buying a new build with a view to let?

The Government has tried its best to put you off doing this personally, but if you fancy a challenge maybe this will be a way to get your own back!

Let’s imagine a property being bought for £500,000. I will ignore most costs throughout just to keep it simple.

Tax Plan For New Buy-To-LetThe following article is credited to Charles Olly of Price Bailey Accountants.

The plan

Step 1: Disclose this planning to the seller and your banker. You can’t do it without their help.

Step 2: One of you, let’s say Wife, contracts with the builder to take a 10 year lease of the new house, for a rent of say £1,000 per year. The premium payable for the lease is agreed to be £170,000.

Step 3: Husband contracts to buy the freehold for £330k.

Step 4: Husband and Wife jointly agree with a bank on a joint BTL mortgage for say £170,000. The bank takes charges over the Wife’s lease and the Husband’s freehold.

Step 5: On completion the bank’s money is used by the Wife to pay for her lease. The freehold and costs are paid for by the Husband from other resources.

Step 6: The Wife lets the property on the open market for say £22,000 per annum. She incurs interest of say £5,000 per annum on the mortgage and pays £1,000 per annum rent to her Husband.

Steps 7 to 16. Repeat step 6 nine times.

Step 17: The Wife’s lease ends and the Husband becomes entitled to possession.

Step 18: The Husband sells the house.

Tax analysis

There are funny tax rules around leases, as readers may know, but the following is a broad analysis of the position.

The Wife bought a lease for £170,000, paid £50,000 in interest, paid £10,000 in rent and received £220,000 in rent. She has actually made a small loss (not surprising given the 100% mortgage) but because of the odd way the numbers work for tax purposes she has a taxable profit of just over £20,000. If she is a basic rate tax payer her aggregate tax bill over ten years will be just £4,120.

The Husband bought a freehold for £330,000 and received £10,000 in rent. If he is an additional rate tax payer his total income tax will be £4,500.

Between them, they have received £220,000 in rent and paid £50,000 in interest, (ie net rents of £170,000) but their combined income tax bill is just £8,520. Somewhat less than the £76,500 that would have been payable had the additional rate applied in full.

The catch…….

The catch is that this nicely managed Income Tax becomes a nasty Capital Gains Tax (CGT) liability on disposal. This is because the CGT base cost of the property is only £330,000, not £500,000, and the CGT on sale will therefore be about £47,000 more than the couple might have hoped.

So, the idea has legs if you want to manage down your Income Tax as you go, accepting that you will pay most of it back in Capital Gains Tax on sale.

Don’t forget of course that there is no CGT on death. So if you plan to retain the investment until your grave (or in the example above more precisely the Husband’s grave) then the CGT never does come back to haunt you (although of course he might).

Does it have to be Husband and Wife? No, but the “couple”, whether Husband and Wife, father and son, settlor and trust, or human and company has to be acceptable to the bank as a joint borrower if a mortgage is involved.

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Luk Udav

21:29 PM, 17th January 2017, About 8 years ago

And you think HMRC won't jump on this like a tonne of bricks?

Old Mrs Landlord

6:44 AM, 18th January 2017, About 8 years ago

Convoluted tax avoidance schemes like this will do little to improve the public image of landlords. Some of us understand that all public services have to be paid for by tax and we should all be content to pay our fair share. I emphasise the word 'fair'.

Monty Bodkin

8:59 AM, 18th January 2017, About 8 years ago

"And you think HMRC won’t jump on this like a tonne of bricks?"

No -Assuming that this is legal (which it appears to be), and given that HMRC only carry out formal tax investigations on around 1 in 500 people.

Finding a lender and the CGT seem to be the bigger problems with this.

Monty Bodkin

9:07 AM, 18th January 2017, About 8 years ago

Reply to the comment left by "Old Mrs Landlord" at "18/01/2017 - 06:44":

Convoluted tax avoidance schemes come about as a result of convoluted unfair taxes.
As the man said;
"Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes."

Luk Udav

18:17 PM, 18th January 2017, About 8 years ago

Reply to the comment left by "Monty Bodkin" at "18/01/2017 - 09:07":

Indeed, but that was long ago in a far away time. And HMRC don't seem to believe in this precept any longer.

It's clearly artificial (clue: "Steps 7 to 16. Repeat step 6 nine times.") and once HMRC got a whiff of it and said so, no lender would touch it with a barge pole - the penalties aren't worth the candle. And I bet no accountant would sign off on the accounts for same reason. I know mine wouldn't but then he's a bit of a scaredy cat.

Not that at first sight it isn't attractive!

Old Mrs Landlord

18:43 PM, 18th January 2017, About 8 years ago

It was my understanding also that the judicial ruling Monty quoted had been superseded by the GAAR legislation.

Mark Alexander - Founder of Property118

18:54 PM, 18th January 2017, About 8 years ago

Reply to the comment left by "Old Mrs Landlord" at "18/01/2017 - 18:43":

Not superseded but supplemented.

Mark Alexander - Founder of Property118

18:56 PM, 18th January 2017, About 8 years ago

Reply to the comment left by "Luk Udav" at "18/01/2017 - 18:17":

The article was written by an accountant at Price Bailey Chartered Accountants.

Maybe you need to find a new one?

Old Mrs Landlord

18:57 PM, 18th January 2017, About 8 years ago

Well, perhaps modified would be more accurate.

Mark Alexander - Founder of Property118

22:44 PM, 18th January 2017, About 8 years ago

Reply to the comment left by "Old Mrs Landlord" at "18/01/2017 - 18:57":

Tax legislation is constantly modified and updated.

GAAR is merely a set of rules states which forms of avoidance are NOT acceptable.

GAAR is a set of rules, not a set of principles.

The principles of Lord Dennings statement from 1936 still apply today. It remains perfectly Legal to arrange your affairs to minimise your tax liability so long as you follow and obey the rules.

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