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

JJ

13:58 PM, 5th August 2019
About 2 months ago

Reply to the comment left by Mark Alexander at 05/08/2019 - 12:43
Sorry: I meant the children and grandchildren have a CGT annual allowance.

Mark Alexander

13:59 PM, 5th August 2019
About 2 months ago

Reply to the comment left by Dylan Morris at 05/08/2019 - 13:45
Hi Dylan

Providing that your capital account hasn't gone overdrawn, or to put it another way, that you would not be withdrawing more money than you had invested into the business, the answer is that you can spend the additional borrowed money on whatever you wish and still be able to claim the tax relief on the mortgage interest.

Please see the examples in HMRC's manuals BIM45700 >>> https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim45700

The third example is best suited to the scenario you have posed, because in that example the £150,000 of additional borrowings was used to purchase a holiday home in Spain and the restriction only applied to £40,000 which related to the overdrawn capital account. The interest on the other £110,000 was allowed.

Mark Alexander

14:01 PM, 5th August 2019
About 2 months ago

Reply to the comment left by JJ at 05/08/2019 - 13:58
I accept the children and the grandchildren have an annual CGT exemption allowance but I do not see the relevance of it in this context, because they would not be crystallising capital gains based on the scenario you have outlined.

Gromit

14:38 PM, 5th August 2019
About 2 months ago

Reply to the comment left by Monty Bodkin at 04/08/2019 - 01:13
I might be wrong here but if you sell you'd probably pay CGT on any up lift in property value, and then probably pay IHT on the proceeds when you die.

If you don't sell isn't it just the IHT that's payable?

Mark Alexander

14:49 PM, 5th August 2019
About 2 months ago

Reply to the comment left by Gromit at 05/08/2019 - 14:38
Correct

Mark Smith (Barrister-At-Law)

15:24 PM, 5th August 2019
About 2 months ago

Reply to the comment left by Mark Alexander at 05/08/2019 - 13:53
It is the interest on the new loan that is the deductible expense. The new loan replaces the cash removed from the business by the taxpayer and the cost of the new loan is therefore in principle allowable.

Mark Alexander

15:31 PM, 5th August 2019
About 2 months ago

Reply to the comment left by Mark Smith (Barrister-At-Law) at 05/08/2019 - 15:24
Yes I think we are saying the same thing

Appalled Landlord

23:00 PM, 5th August 2019
About 2 months ago

Reply to the comment left by Mark Alexander at 05/08/2019 - 13:59
Hi Mark
Having followed your link it is clear that the interest on a loan taken out to withdraw capital is an allowable deduction, regardless of what the money is spent on. So it would give rise to a 20% tax credit.

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