Can Lifetime BTL Mortgages be used to accelerate our plans?

by Readers Question

7:30 AM, 3rd August 2019
About 3 months ago

Can Lifetime BTL Mortgages be used to accelerate our plans?

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Can Lifetime BTL Mortgages be used to accelerate our plans?

Since reading two recent articles about Lifetime BTL Mortgages my head has been spinning with ideas, my conclusions from which I would like to sanity check with this superb online community.

As background; my wife and I are in our mid 70’s. We have a modest portfolio of Buy-to-Let properties worth circa £2 million and we live off the income they produce. We have no mortgages.

We have three children and six grandchildren, none of which are the slightest bit interested in getting into the property business. When we have passed on our estate will be sold and shared between them in accordance with our Wills.

My thinking is thus …

We take £800,000 of Lifetime BTL mortgages and gift that money to our children and Grandchildren so that we can see them enjoy it whilst we are still alive.

Our cashflow actually improves, because not only do we not have to service the mortgage interest, but we can claim tax credits to the value of 20% of the interest accruing every year.

The gifts we make to our family now will be Potentially Exempt Transfers, so if we live for more than seven years we will have reduced our exposure by £800,000 of value of our estate for inheritance tax purposes.

We appreciate the debt will be rolling up and will eventually need to be paid from the value of our estates, but that is not our concern. Time and value of money is far more important, and the improved cashflow and lower tax bills will be most welcome too. In any case, the increased debt will also reduce the value of our estate, so even less for the tax man.

There has also been a lot of talk about wealth tax, and if that comes to pass this could also help to mitigate that. This is because we will be less wealthy than we were before, on paper at least. However, the reality is that we will have improved cashflow as a result of lower tax on our seemingly lower incomes for tax purposes and the added pleasure of seeing our children and Grandchildren enjoying their inheritance before we have actually died. The inheritance pot will reduce but I don’t see why that should pose a problem. We never inherited anything and it isn’t a given right for anybody else to do so. If there is money left over at the end of our lives that’s a bonus for those who benefit from it. It seems we have an opportunity to ‘have our cake and eat it’.

It seems to good to be true, am I missing something?

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Comments

David Forsdyke

15:04 PM, 3rd August 2019
About 3 months ago

Hi
I used to work for the FCA and am regarded as an expert in Lifetime Mortgages. I regularly give advice to clients. You have set out a very reasoned argument and no I don't think you're missing anything, although I'm not sure you can get the 20% tax credits you mention when the interest is rolling up (the rules say 'interest payment' and with roll up there is no payment). However, there are a couple of things I would strongly recommend you ask yourselves and your family;
1. Do your children & grandchildren need £800,000 now? or would they rather inherit more later? Yes it would be nice to see them enjoy it now, but there is a risk that you (and they) might regret the decision later.
2. Do you have other assets you could fall back on if you need to pay for care or have other unforeseen needs in the future? You'll be kicking yourselves if you find you need the money 10 years from now and can't borrow more.

The other thing I would mention is that there are not many lenders offering lifetime mortgages on buy to let properties at the moment, but I think that might change over the next few years, which could improve the price of products being offered.

Technically they aren't actually 'Lifetime mortgages' on a buy to let because of the way the FCA defines that term, but they work in a similar way.

I hope that's helpful.

Mark Alexander

15:12 PM, 3rd August 2019
About 3 months ago

Reply to the comment left by David Forsdyke at 03/08/2019 - 15:04
My view is that the interest has been paid, and that the tax credit can be applied as appropriate. A mortgage statement will clearly show that it has been paid, albeit with additional borrowed money.

Mark Alexander

15:14 PM, 3rd August 2019
About 3 months ago

Reply to the comment left by Mark Alexander at 03/08/2019 - 15:12
The other points you have made are fair and reasonable

David Forsdyke

15:28 PM, 3rd August 2019
About 3 months ago

Thanks Mark. I hope you're right. An accountant or tax expert should be able to confirm. Do look me up if you need any further help. David

Mark Alexander

15:29 PM, 3rd August 2019
About 3 months ago

Reply to the comment left by David Forsdyke at 03/08/2019 - 15:28
Likewise! >>> https://www.property118.com/tax/

Mark Smith (Barrister-At-Law)

19:31 PM, 3rd August 2019
About 3 months ago

S.272B (5) ITTOIA as inserted by s.24FA(2)/2015
"(5)“Costs”, in relation to a dwelling-related loan, means—
(a) interest on the loan,
(b) an amount in connection with the loan that, for the person receiving or entitled to the amount, is a return in relation to the loan which is economically equivalent to interest, or
(c) incidental costs of obtaining finance by means of the loan."

I would say that unless interest or equivalent payments are actually being paid out in any tax year there is no tax credit to apply to that year's computation. S.24 does not seem to cater for the situation where a liability accrues in a tax year but is not actually met.

Mark Alexander

19:35 PM, 3rd August 2019
About 3 months ago

Hi Mark

Would you agree that rolled up interest is a finance cost in much the same way as a fees added to a mortgage advance are also deemed to be finance costs?

Mark Alexander

19:51 PM, 3rd August 2019
About 3 months ago

Reply to the comment left by Mark Smith (Barrister-At-Law) at 03/08/2019 - 19:31
Just to be clear here; the interest on these loans is accruing and will show on the annual mortgage statement in much the same way as it would on an overdraft facility, bridging loan or credit card statement. These are not shared appreciation mortgages.

Mark Smith (Barrister-At-Law)

20:05 PM, 3rd August 2019
About 3 months ago

“Tax reduction for non-deductible costs of a dwelling-related loan
274ATax reduction for individuals
(1)Subsections (2) to (5) apply if—
(a)an amount (“A”) would be deductible in calculating the profits for income tax purposes of a property business for a tax year but for section 272A, and
(b)a particular individual is liable to income tax on N% of those profits, where N is a number—
(i)greater than 0, and
(ii)less than or equal to 100.
(2)The individual is entitled to relief under this section for the tax year in respect of an amount (the “relievable amount”) equal to N% of A.
(3)Subject to subsection (4), the amount of the relief is given by—

where BR is the basic rate of income tax for the year, and L is the lower of—

(a)the total of—
(i)the relievable amount, and
(ii)any difference available in relation to the individual and the property business for carry-forward to the year under subsection (5), and
(b)the profits for income tax purposes of the property business for the year after any deduction under section 118 of ITA 2007 (“the adjusted profits”) or, if less, the share of the adjusted profits on which the individual is liable to income tax.
(4)If the individual’s gross finance-costs relief for the year (“GFCR”) is greater than the individual’s adjusted total income for the year (“ATI”), the amount of the relief under this section for the year in respect of the relievable amount is—

where BR and L have the same meaning as in subsection (3).

(5)Where the amount (“AY”) of the relief under this section for the year in respect of the relievable amount is less than—

where BR is basic rate of income tax for the year and T is the total found at subsection (3)(a), the difference between—

(a)T, and
(b)AY divided by BR (with BR expressed as a fraction for this purpose),
is available in relation to the individual and the property business for carry-forward to the following tax year.
(6)For the purposes of this section—
(a)an individual’s adjusted total income for a tax year is the individual’s total income for that year less the total of—
(i)so much of that total income as is savings income,
(ii)so much of that total income as is dividend income, and
(iii)any allowances to which the individual is entitled for that year under Chapter 2 of Part 3 of ITA 2007 (individuals: personal and blind person’s allowance), and
(b)an individual’s gross finance-costs relief for a tax year is the total relief to which the individual is entitled for the year under this section before any adjustment under subsection (4).

Mark Smith (Barrister-At-Law)

20:08 PM, 3rd August 2019
About 3 months ago

So unless the taxpayer has to make payments in that tax year that would be allowable expenses but for s.24 disallowance I cannot see how the tax credit

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