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

Mark Alexander

7:14 AM, 4th August 2019
About 2 months ago

Reply to the comment left by Monty Bodkin at 04/08/2019 - 01:13
I hear what you say in terms of his workload reducing and his risk reward changing if he sells some properties. However, he’s not said he wants that but he has said that he doesn’t want to reduce his income, and that’s exactly what the consequences of selling property would be.

Monty Bodkin

8:30 AM, 4th August 2019
About 2 months ago

Reply to the comment left by Mark Alexander at 04/08/2019 - 07:14
I can see this might work for some situations. TBH it's a strategy I'd not considered before and will take some time to think through the implications (thanks for posting it).

It's about the opposite of what I'm doing, which is selling off one a year and paying down debt. Because I'm increasing rents, my income is actually going up for doing less work.

Mark Alexander

9:04 AM, 4th August 2019
About 2 months ago

Reply to the comment left by Monty Bodkin at 04/08/2019 - 08:30
I am also doing what you are doing. However, there will never be a ‘one-size-fits-all’ strategy and when I am in my 70’s I may well be in a similar position to the people who have been posting on these threads about BTL Lifetime Mortgages.

I created Property118 to share and discuss best practice, because we can all learn from other people. The forum has proven to be especially useful to consider strategies we may otherwise never have even thought of for ourselves.

JJ

12:02 PM, 5th August 2019
About 2 months ago

You have to live for 7 years for the investment to become a potentially exempt transfer. A no-deal Brexit might cause a dip but maybe not - if the pound devalues and makesUK properties more attractive to foreign investors they might go up (in sterling) once the uncertainty has gone. So over that 7 years there's a potential capital gain.
So is that really better than incorporating the business and using freezer shares? Or incorporating the business and gifting the shares to them now? Or incorporating the business progressively letting them buy the shares at the prevailing rate of stamp duty prevailing on shares for a debt and then gifting the debt to them?

Mark Alexander

12:24 PM, 5th August 2019
About 2 months ago

Reply to the comment left by JJ at 05/08/2019 - 12:02
An excellent set of questions and assumptions all mixed in there.

To establish whether incorporation is a viable option would require a lot more detail to determine the potential for exposure to Stamp Duty.

Incorporating the business using S162 would roll the gain into the shares and gifting those shares would then crystallise that gain. On that basis I wouldn't recommend that unless there were significant CGT losses to utilise.

However, if incorporation was viable, then a Capital Account Restructure might also be viable. See https://www.property118.com/tax/capital-account-restructure-landlords/. The benefit of the resultant Directors Loans could then be gifted as a Potentially Exempt Transfer. However, that would not enables this couple to fully achieve the desires their desires of seeing their family enjoy a significant portion of their inheritance before death.

JJ

12:39 PM, 5th August 2019
About 2 months ago

Reply to the comment left by Mark Alexander at 05/08/2019 - 12:24
Maybe: Although of course we don't know enough about the children/s grandchildren's needs right now. What we do know now though is that three children, six grandchildren (and possibly three spouses?) all have a personal allowance and granny and grandad can still be paid an income from the company.

Mark Alexander

12:43 PM, 5th August 2019
About 2 months ago

Reply to the comment left by JJ at 05/08/2019 - 12:39
Yes that is also true, and perhaps I am missing the relevence of what you are saying. What are your thoughts in regards to the personal allowances? We know the children and grandchildren have no interest in the business, so employing them or making them Members of an LLP seems to be a non-starter.

Appalled Landlord

13:20 PM, 5th August 2019
About 2 months ago

Two points occurred to me when I read this question. The first point, that the £800,000 might exceed the costs of purchase and improvements, is made irrelevant by the fact that the loan would clearly not be wholly and exclusively for the purposes of the letting business.

HMRC states:
“Increasing your mortgage
If you increase your mortgage loan on your buy-to-let property you may be able to treat interest on the additional loan as a revenue expense, as long as the additional loan is wholly and exclusively for the purposes of the letting business.
Interest on any additional borrowing above the capital value of the property when it was brought into your letting business isn’t tax deductible.”
https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income#how-to-calculate-your-taxable-rental-profits

Or as my Inspector of Taxes put it in a letter to me 20 years ago “It is the purpose for which the loan is used that governs whether it is a qualifying loan; it is not the surety on which the lender safeguards his loan that is relevant.”

Dylan Morris

13:45 PM, 5th August 2019
About 2 months ago

Reply to the comment left by Appalled Landlord at 05/08/2019 - 13:20
That’s exactly what I immediately thought when I read this reader’s question. Can you really raise £800,000 just to give to somebody and claim it as a valid expense for your rental business. Surely you’d have to be making improvements to the properties. Otherwise I could raise £175,000 against my own portfolio to purchase a Lamborghini just because I’ve always fancied one and perhaps have some foreign holidays as well. Would the Inland Revenue really let me claim mortgage interest tax credit ?

Mark Alexander

13:53 PM, 5th August 2019
About 2 months ago

Reply to the comment left by Appalled Landlord at 05/08/2019 - 13:20
I fully appreciate the basis of restrictions on borrowings in excess of base costs and do not challenge that point.

However, in regards to “the additional loan is wholly and exclusively for the purposes of the letting business” HMRC manual BIM45700 says that withdrawal of capital is perfectly legitimate business purpose and even goes on to provide examples of how capital withdrawn from the business is treated for the purposes of claiming interest on borrowing to facilitate it as a legitimate business expense – see https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim45700

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