Rearranging finances around unencumbered BTL?

by Readers Question

14:17 PM, 8th February 2017
About 2 years ago

Rearranging finances around unencumbered BTL?

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Rearranging finances around unencumbered BTL?

I am a new landlord and have recently started renting out a property I own outright, I also have a residential property which is mortgaged and can’t help, but feel I may be able to arrange my finances in a better manner, but I’m unsure how to go about obtaining good advice.tax cut

The residential property is worth around £135k, with a £109k mortgage at 2.99%

The BTL property is worth approx. £100k with no mortgage and generates £363 per month

I am a 20% tax payer, starting to near the 40% bracket, however my wife has some tax free allowance and the whole 20% bracket available, so I am looking into switching the beneficial interest in the BTL property 99/1 in her favour. My understanding is that the new tax rules should not affect 20% tax payers.

Would there be any advantage in re-mortgaging the rental property and using the capital to pay down the residential mortgage? would this offer any tax benefits for example?

Or alternatively should I consider taking equity out of the rental property to purchase a 2nd BTL?

Paul



Comments

Mark Alexander

8:23 AM, 9th February 2017
About 2 years ago

Hi Paul

My suggestion would be to transfer the legal title of the BTL property to joint names whilst there is no mortgage. This will ensure there is no SDLT payable. There is no CGT either on transfers between spouses.

Make sure the conveyancing solicitor or Barrister who arranges the above registers the title with HM Land Registry as Tenants in Common, then puts a Declaration of Trust into place showing the 99:1 split and submits Form 17 to HMRC.

It is very important to do this in the correct order. If you would like me to recommend an experienced lawyer to deal with the above please let me know.

If you decide to purchase additional BTL properties, mortgaging the unencumbered BTL is a good way to raise funds for deposits, fees, refurbishment and liquidity. Please let me know if you would like me to introduce you to a good broker.

Once you have cash in hand from the remortgage I suggest you and your wife form a Limited Company to make future acquisitions of BTL property and lend the funds you have raised to that company in the form of a "Directors Loan". This is because companies are now significantly more tax advantageous. You will each be able to withdraw £5,000 of dividends every year tax free, subject to profitability of course. You will also be able to draw on the Directors loan account tax free. If your wife still has any nil rate band tax allowance left she could also take a small salary from the company tax free.

Profits retained in a company are taxed at a much lower rate than for individuals. Also, the restrictions on finance cost relief only apply to individual landlords, not companies.

You might also find the articles in the Advice section of this website useful - please see https://www.property118.com/how-to-become-a-respected-profitable-landlord/60765/
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John Constant

10:48 AM, 9th February 2017
About 2 years ago

Paul,
I work for a mortgage brokerage who have been closely aligned with Property 118 for several years. We do not advise on taxation issues, so I am unable to comment on the pro's and cons of that situation. However, you raise an interesting query with regard to what to prioritise first, residential or investment.

There is no correct answer to this, as it comes down to your attitude to risk exposure. My personal attitude to risk exposure is quite averse, others will be more than willing to take the risk on expansion. No one is right, no one is wrong.

For me, I would want to get the roof over my own head secure. That's my castle, my home. You may have different feelings on that point, but you are fortunate to have an unencumbered BTL property available to you, which gives you options. As Mark said, remortgaging that property can be an excellent way of providing a deposit for an additional purchase. If you wanted the additional security, you could also use the equity released to pay down your residential mortgage.

Since the recent changes to rental income requirements for BTL mortgages on January 1st, it has been more difficult to achieve good outcomes in terms of equity released. Difficult, however, not impossible. I don't know what your personal circumstances are, but it might be possible to release £75,000 from your BTL.

One other point, you say that your residential mortgage is at a rate of 2.99%. A quick check has shown that you are just a smidgeon over 80%LTV. By paying off £1,000, you will be down to 80% and you could qualify for a sub 1.4% mortgage, which could also save you some cash on a monthly basis. Even a 5 year fixed rate could be secured at 2.14%, depending upon your circumstances.

Mark Alexander

10:55 AM, 9th February 2017
About 2 years ago

Reply to the comment left by "John Constant" at "09/02/2017 - 10:48":

Excellent comment John, thank you 🙂

NOTE FOR PAUL - if you would like to contact John, as with all official sponsors of Property118, he has a contact form on his member profile. You can see this by clicking on the link with the members name or via a search of the member Directory which can be found via our Site Navigation (top left of all pages)
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CazT

13:53 PM, 9th February 2017
About 2 years ago

Reply to the comment left by "John Constant" at "09/02/2017 - 10:48":

We are also risk adverse, John and have decided to use the monies from selling two BTL plus some from moving from last home, to pay off our residential mortgage. I am retired and my husband is five years away from retirement. He has recently gone from working a five day week to working a three day week (our decision) and our aim was to save as much as possible in the next five years and not to give any of it to our residential mortgage holder (the property was previously a BTL property). We are currently in the process of remortgaging our remaining BTL properties in five year fixes, which will take us to the next step - both retired. Some excellent advice on this discussion gents!

Paul Lookman

13:56 PM, 10th February 2017
About 2 years ago

Firstly, thank you all very much for the very informative replies, you’ve definitely given me food for thought, and I think there is definitely something to be said for securing the roof that’s over not just my head but over my families, which is ultimately something you can’t put a price on in monetary terms, I think I’m swayed more towards this due to having a young family, and now’s probably not the right time to opt for a higher risk strategy.

I think I will do some more investigation into paying my residential mortgage off with the equity from the BTL via an interest only deal (and therefore transferring any debt/risk onto the BTL property) my thinking being I can then offset the interest payments against any tax due and Ill also be better off each month in terms of cash as Ill no longer have to service the residential mortgage.

I can then use the spare income to save towards a deposit for a second BTL at some point in the future while enjoying more security in the meantime.

John Constant

14:50 PM, 10th February 2017
About 2 years ago

Paul,

Devil's advocate time now!

Don't forget that the ability to offset your mortgage interest payments will diminish down to zero over the next 4 years. As I understand things, it will not affect you at the moment as you are a 20% tax payer, but as the ability to offset interest reduces, you will be making more profit (according to HMRC!, but the less said about that the better), which could tip you over into a higher rate tax band.

My advice - speak to an accountant to confirm your position

Paul Lookman

15:28 PM, 10th February 2017
About 2 years ago

Thanks John, that's definitely something I will have to take into account, I'm hoping that changing the beneficial interest in the BTL so that it favours my wife 99/1 will be the solution to this.

I think finding a good accountant is sage advice.

Mark Alexander

16:45 PM, 10th February 2017
About 2 years ago

Reply to the comment left by "Paul Lookman" at "10/02/2017 - 15:28":

Hi Paul

Have you downloaded our free Tax Tutorials yet?

If not please see >>> https://www.property118.com/free-landlord-tax-tutorials/
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