Can Lenders help with S24 – High fees Low rates?

by Readers Question

9:21 AM, 14th November 2018
About a month ago

Can Lenders help with S24 – High fees Low rates?

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Can Lenders help with S24 – High fees Low rates?

I have not seen this discussed before, but was wondering why there aren’t more BTL lending products where there is an much larger arrangement fee and much reduced interest rate as the fee is tax deductible, but the interest is not and would help get around S24 for those who are unincorporated.

Basically if you stump up more in fees upfront, you save S24 tax.

e.g. let’s say on a 100k 5 year fix (most optimal BTL mortgage in my opinion), I reckon there is a 37% S24 tax reduction (Note I am talking about the additional S24 tax to be fully imposed by 2021 and exclude as the other usual other taxes) if an arrangement fee went from, say, 2k to 10k and the interest rate went down from 2.4% to 1.4%. The 10k would need to be paid upfront and not added to the loan of course otherwise the fee is no longer deductible.

Here’s the calculation:
1. Normal situation post 2021: Assume higher rate tax payer, 100k mortgage fixed for 5 years at 2.4% with 2k arrangement fee. Annual interest is 4.2k. Over 5 years, the total additional S24 tax would be 8.4k. The Fee to loan ratio is 0.67%

2. New BTL high charge product: Same mortgage, but lender ups the arrangement fee to 10K and reduces the interest rate to 1.49% so same overall mortgage cost over 5 years but the extra 8K arrangement fee is deductible. So annual interest drops to 2.6k and the 5 yr. S24 tax drops to 5.2k saving 3.2k (approx. 38% saving) but the fee to loan ratio rises to 10%.

3. Obviously, the calculation can be taken further but hits a limit to what you can afford upfront e.g. a 20K upfront arrangement fee would now result in an 85% S24 tax saving but if you want to borrow 100k, you are unlikely to be able to afford the 20k upfront fee – a fee to loan ratio of 20%.

The numbers start going tougher with a bigger (say 300k) mortgage as the fees tend to stay the same but there are still opportunities if you can play with the fee to loan ratios. A fee of 20k (6.6% fee to loan) will save you 28% S24 tax. To get a 60% saving in S24 tax, you need a fee of 40k.

So why can’t more lenders do this – I think it would be a popular option plus lenders should like the ideal of getting more funds upfront.

Hugh



Comments

Neil Patterson

9:26 AM, 14th November 2018
About a month ago

Hi Hugh,

This idea seems to be going down the route of a Sharia style mortgage where no interest is allowed to be paid.

The mortgage market is quite mature and if lenders consider there is demand enough to price a BTL in this way and make their profit upfront I am sure they would look at it.

However what if you need flexibility or have to sell? You are then crystalising the lenders profit without taking full advantage, but I suppose that is similar to early repayment charges.

Binkie

10:54 AM, 14th November 2018
About a month ago

I think this is a good idea. Clearly, and as you mentioned, it has notable cash flow implications by front loading all the negative cash flow to the beginning of the mortgage term, but I like it and would certainly look into it if it was available. Particularly for landlords that are too small to take advantage of the more complex tax planning options devised by Mark. As long as the lender dropped early repayment charges accordingly, as well as adjusting the fee/rate ratio. Why not ask your mortgage broker about this, I will. The more of us ask, the more chance this will get considered by the more nimble lenders.

John Parfett

12:27 PM, 14th November 2018
About a month ago

Reply to the comment left by Neil Patterson at 14/11/2018 - 09:26
How do Sharia mortgages work if no interest is payable?

AA

14:08 PM, 14th November 2018
About a month ago

Reply to the comment left by John Parfett at 14/11/2018 - 12:27
You pay "rent" - interest by any other name. And that s the way HMRC would look at it.

Seething Landlord

0:17 AM, 15th November 2018
About a month ago

Hang on chaps, I think you'll find that S24 restrictions apply to finance costs, including arrangement fees, not just interest.
The HMRC UK Property notes say "for the 2017 to 2018 tax year, you can only claim 75% of the cost of getting a loan, or alternative finance to buy a residential property that you let, and 75% of any interest on such a loan or alternative finance payments"

Neil Patterson

7:50 AM, 15th November 2018
About a month ago

Reply to the comment left by Seething Landlord at 15/11/2018 - 00:17
Yes Good Point Seething Landlord. It includes fees (see beow)

From .gov >> https://www.gov.uk/government/publications/restricting-finance-cost-relief-for-individual-landlords/restricting-finance-cost-relief-for-individual-landlords

"General description of the measure

This measure will restrict relief for finance costs on residential properties to the basic rate of Income Tax. This will be introduced gradually from 6 April 2017.

Finance costs includes mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan.

Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs.

Landlords will be able to obtain relief as follows:

in 2017 to 2018 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
in 2018 to 2019, 50% finance costs deduction and 50% given as a basic rate tax reduction
in 2019 to 2020, 25% finance costs deduction and 75% given as a basic rate tax reduction
from 2020 to 2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction"

Colin Dartnell

10:00 AM, 15th November 2018
About a month ago

Not sure this is correct, my understanding is that no financial costs will be deductable by 2020. Barring the 20% they so kindly give us back!

Mervin SX

8:46 AM, 17th November 2018
About 4 weeks ago

Reply to the comment left by Seething Landlord at 15/11/2018 - 00:17
Absolutely!

Section 24 applies to interest rates and mortgage arrangement fees. So no easy way around this stupid change!

I did take advantage and pay early repayment charges on some of my mortgages, to switch to lower rates - the ERC is tax deductable before S24 came into place. It worked out a whole lot better for me.


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