Sanity check required!

by Readers Question

12:20 PM, 25th August 2016
About 2 years ago

Sanity check required!

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Sanity check required!

Sanity check required

Myself and my wife are established BTL landlords with a high value portfolio of six properties in London. The net result taxwise is that we both now have incomes of just above the higher rate limit of £43K and no other income.

The purpose of the portfolio is purely is to provide a long term retirement income.

We wish to make an out of London BTL investment in a house of about £95K . The problem is that due to Mr Osborne’s tax changes, when I did the sums to find out how much of my monthly “profit” will be taken by the taxman under the new rules, I was shocked to see that my profits were wiped out leaving me £25 a month for my trouble. Given that I wanted an investment for income and not particularly capital growth then logic dictates to me that I should not make this purchase.

Then I got thinking and came up with the following;

1. Raise £100K against an unencumbered London property in the form of a mortgage.
2. Create a limited company and lend the company £100k
3. The company purchase the property.
4. Only take the 5k tax free dividend form the company

The net result is that:

1. My own fiances will benefit form the mortgage interest tax relief on the new loan on the London property as I will get a bigger tax credit
2. My own non company income will not be increased by the rent.
3. My company will get the rent and I will be able to take that as tax free dividend (up to £5,000) to add to my non company portfolio income

I would consider porting all my BTL properties to the new company but CGT and Stamp Duty would make that prohibitively expensive..

Finally do you have property oriented accounts who can assist with the creation and maintenance of the Company?

So what do reckon?

Reasonable idea or not?

Thanks

Chris



Comments

Mark Alexander

12:25 PM, 25th August 2016
About 2 years ago

Hi Chris

There is insufficient data to be able to say whether your plan meets your objectives or not.

How much gross rent will the new property produce?

After you deduct the costs of insurance, management, maintenance, an allowance for rental voids, gas checks etc. how much will this leave you with per annum?

When you have this figure you can compare it with the amount you will be paying for your mortgage. Remember that after 2020 your mortgage interest will not be treated as an expense. Instead you will receive 20% tax relief on only.

The general principal of utilising a limited company in order to obtain the first £5,000 of dividend income for you and your wife tax free is a good one.

Jon Pipllman

13:19 PM, 25th August 2016
About 2 years ago

Mark A is correct that specific advice isn't possible with just the information supplied, but I think the decision about how (and maybe even if) to proceed depends on the longer term plan.

If this purchase was to be a one off, then it is marginal if it is worth it at all

If this is to be the first of a few or many, then the ltd co route is the most sensible way to acquire the property under the new rules

The tax credit available on the finance costs for personally held properties is still significant, when coming to it from an unencumbered position

With some sums you will be able to calculate the effect for yourself and your wife of different levels of leverage on the personally held and company held properties. Those sums will help you decide if and how to proceed to add to your portfolio

Chris Unwin

13:49 PM, 25th August 2016
About 2 years ago

Thanks Mark and Jon,

The longer term plan is to make further acquisitions at about the same price over the next year so to end up with 3/4 properties in the company and then to graually sell off the non company properties as and when circumstances dictate or require.

The rent is £7200 pa. The annual expenses except mortgage interest are about £2200 pa. I will still be paying £3325 interest on the remortgage of the previously unemcumbered property in London.

Given that I am a higher rate payer already, Then I will pay 40% of (7200-2200)=2000 but get a tax rebate from the remortgaged property of £665 making my net gain of
5000-2000+ 665=3665 or about £300 pcm.. just enough to pay the new mortgage on the previously unemcumbered property in London.

Any comments most welcome

Chris

Mark Alexander

14:27 PM, 25th August 2016
About 2 years ago

Reply to the comment left by "Chris Unwin" at "25/08/2016 - 13:49":

So if your cash flow will increase by approximately zero and capital appreciation is of no interest to you why exactly are you doing this?

If you need more money than you have currently why don't you just sell property or borrow for now and sell later?

Jon Pipllman

14:51 PM, 25th August 2016
About 2 years ago

It isn't an investment opportunity that I would fight you for

Do you think you could buy the target property for less (i.e. £10k+ less)

Fast forward in time a little and imagine how things would look if you did acquire 4 properties of this nature.

You would have £380k debt that you don't have now and broadly the same cashflow that you have now.

All that looks like to me is a set up for pain if interest rates were to rise.

Factor in the hassle of managing remote properties and the responsibilities of running the Ltd and it looks even less attractive

Without the prospect of capital growth to compensate for the near zero cashflow, I can't put myself into a position where I would want to go there.

Looking at it from another angle. If you put the rent up on your existing 6 properties by £10 per month each, you would get more after tax income than you would were you to buy that house.

matchmade

15:02 PM, 25th August 2016
About 2 years ago

Er, isn't the £5000 dividend only tax-free if you are a basic-rate taxpayer? It's added to your other income and if it takes you and your partner over the £43K threshold, you pay tax on it. So like Mark, I don't see the point of this investment if you are already a higher-rate payer, and your tax situation is only going to get worse up to 2020. Perhaps it would be better to concentrate on managing your existing properties, paying down debt so you are never at the mercy of interest rate rises, and investing in non-property assets with any surplus from income or by selling off a house or two.

If you don't need the income or capital, the best game in town at the moment appears to me to be SIPP pensions, not property. If you do decide to buy this £95K house, I would extract any rental surplus from the company by having it make pension contributions, not dividends (unless of course you need the income for annual living costs). You and the company can keep making pension contributions until you are 75, and the pension can now be passed on in your estate, rather than used to generate unwanted income.

One way to get your tax bill down would be to spend significant sums on renovations, which could be part of a package of capital investment that also improves the property. Obviously you have to apportion expenditure between replacement and improvement, but if, for example, you built an extension that also required you to replace a clapped-out kitchen (photos needed as evidence), then the kitchen part of the work could be deducted from your annual income and keep your tax bills down.

Chris Unwin

16:09 PM, 25th August 2016
About 2 years ago

Reply to the comment left by "Tony Atkins" at "25/08/2016 - 15:02":

Mark, Jon, Tony,

Thanks to everyone for confirming what I already suspected.

Its a shame as all I wanted was to make a an investment that would generate a couple of hundred pounds a month and increase in value modestly over the long term.

The tax changes have stopped me and others in our tracks.
This exercise does show the importance of really understanding the tax changes and how they will affect you and how import pre purchase analysis is, now more so than ever before.

Theres one last job to do on this ...Call the estate agent and say "No Thanks, courtesy of Mr Osborne"

Chris

Mark Alexander

16:14 PM, 25th August 2016
About 2 years ago

Reply to the comment left by "Chris Unwin" at "25/08/2016 - 16:09":

Hi Chris

Just because this deal doesn't stack up it doesn't mean the next one won't.

You need to find a higher yield.

Jon Pipllman

16:29 PM, 25th August 2016
About 2 years ago

Yes, at a higher yield it can still work

Hence my question previously about buying it for (a fair bit) less

Why not offer £80k and see what happens?

The worst case is that the seller says no, which (imo) is always a better outcome than you saying no without finding out if it could be bought for less.

Chris Unwin

16:33 PM, 25th August 2016
About 2 years ago

Thanks but already got them down from 100k

1 2

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