Tax Plan For New Buy-To-LetMake Text Bigger
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.
The following article is credited to Charles Olly of Price Bailey Accountants.
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.
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 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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