Can Lifetime BTL Mortgages be used to accelerate our plans?

by Readers Question

7:30 AM, 3rd August 2019
About 2 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

Mark Alexander

20:17 PM, 3rd August 2019
About 2 months ago

Reply to the comment left by Mark Smith (Barrister-At-Law) at 03/08/2019 - 20:08
The tax payer has made the payments, albeit with further borrowed money. That’s why the accrued interest shows on the mortgage statement.

Monty Bodkin

20:20 PM, 3rd August 2019
About 2 months ago

Why not just flog one or two off?

Mark Alexander

20:31 PM, 3rd August 2019
About 2 months ago

Reply to the comment left by Mark Smith (Barrister-At-Law) at 03/08/2019 - 20:08
So are you saying that mortgage product fees which are added to a mortgage advance do not qualify as a finance cost for the tax credit either?

I can’t believe that is the case, because all finance costs, on loans which are not restricted due to overdrawn capital accounts, are being treated as qualifying for the tax credit by all accountants insofar as I am aware.

It doesn’t make sense that money borrowed to service interest wouldn’t qualify as a finance cost. If that was the case, overdraft interest would not qualify as a finance cost for the purposes of the claiming the 20% tax credit either. Surely that cannot be right?

Mark Smith (Barrister-At-Law)

20:54 PM, 3rd August 2019
About 2 months ago

All of these sums are finance costs. The issue is when they are brought into account. If there is no payment required to be made by the taxpayer in a tax year attributable to finance costs then I cannot see how the right to a tax credit accrues in that year.
If there is a further loan taken out by the taxpayer which is applied to service previous borrowing then the position is different as this is a payment made by the taxpayer.
If it is merely a ledger entry adding a further year’s interest then I do not think it attracts a tax credit.
Willing to be persuaded otherwise

Mark Alexander

21:03 PM, 3rd August 2019
About 2 months ago

Reply to the comment left by Mark Smith (Barrister-At-Law) at 03/08/2019 - 20:54
That would mean all those finance costs in regards to overdraft interest and mortgage arrangement fees added to the initial advance cannot be claimed until the debt is repaid. If that’s the case, the whole accounting industry is getting this wrong, because they are all accounting for the finance costs as showing on the lenders statements.

Mark Smith (Barrister-At-Law)

21:13 PM, 3rd August 2019
About 2 months ago

If that is so then I certainly would not campaign for these sums not to be allowed.
s.27 ITTOIA https://www.legislation.gov.uk/ukpga/2005/5/section/27
says that an expense claimed carries with it no implication that the sum related has actually been paid. The claiming of an expense is a debit to the taxpayer's income.

See also s.58 https://www.legislation.gov.uk/ukpga/2005/5/section/58

58Incidental costs of obtaining finance
(1)In calculating the profits of a trade, a deduction is allowed for incidental costs of obtaining finance by means of—
(a)a loan, or
(b)the issue of loan stock,if the interest on the loan or stock is deductible in calculating the profits of the trade.
(2)“Incidental costs of obtaining finance” means expenses—
(a)which are incurred on fees, commissions, advertising, printing and other incidental matters, and
(b)which are incurred wholly and exclusively for the purpose of obtaining the finance, providing security for it or repaying it.

Mark Alexander

21:25 PM, 3rd August 2019
About 2 months ago

Reply to the comment left by Mark Smith (Barrister-At-Law) at 03/08/2019 - 21:13
Thankfully, this article will go into our Newsletter next week, and several accountants will read it and hopefully comment. I will be amazed if they don't agree that finance costs (e.g. loan arrangement fees added to a mortgage advance, rolled up interest or overdraft interest) are deemed to have occurred and accepted as having been paid by HMRC when they show on the lenders statements.

Like you, I will certainly not be campaigning to HMRC to disallow such finance costs until the debt is repaid. That would be both a cashflow nightmare for landlords and an accounting nightmare their professional advisers.

Thank you for engaging on this, there certainly appears to be some ambiguity in the legislation here, and as is always the case, we are have ended up agreeing with each other.

It will be interesting to see what others think.

I also think it's healthy that we have had this debate online.

Further thought .... mortgage arrears???

Mark Smith (Barrister-At-Law)

21:28 PM, 3rd August 2019
About 2 months ago

Note to all our readers- Mark A and I normally have these exchanges offline until one of us convinces the other. We can then have a united front on the matter in hand, which we always arrive at in the end.

We are now agreed on the issue raised by the question on the tax credit. Mortgage arrears I would say are in the same category and should be accounted for in the same way.

Mark Alexander

22:14 PM, 3rd August 2019
About 2 months ago

Reply to the comment left by Monty Bodkin at 03/08/2019 - 20:20
Why would you sell the goose that lays the golden eggs? In other words, selling property reduces income and puts a halt on any prospects of benefiting from further capital appreciation on the properties sold.

Monty Bodkin

1:13 AM, 4th August 2019
About 2 months ago

Reply to the comment left by Mark Alexander at 03/08/2019 - 22:14
Why would you sell the goose that lays the golden eggs?

Because you are paying 6% APR for the privilege.

i.e Borrow £100,000, with rolled up compound interest and you owe £200,000 after 12 years.

Effectively, you are just looking after the goose, hoping it will go up in value and pay for itself.
Meanwhile you're feeding it, maintaining it, supplying it with a 'How To Lay Golden Eggs' guide, ensuring it has the 'Right To Lay Golden Eggs', cleaning up its crap, even licensing the bloody thing. All on pain of fines, criminal prosecution and possible imprisonment if you get it wrong.
And at the end of it, giving the lender the golden eggs
-whether it lays them or not.

For an elderly couple in their mid seventies well over the IHT threshold?
Selling one or two has got to be worth serious consideration.

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