Tag Archives: Return on Investment

Tax Treatment of Equity Loans for Buy to Let Landlords Advice, Buy to Let News, Commercial Finance, Financial Advice, Landlord News, Latest Articles, Legal, Mortgage News, Property Investment Strategies, Tax and Accountancy, Tax News, UK Property Forum for Buy to Let Landlords

I have been posting on numerous forums about the introduction of equity loans into the UK buy to let mortgage market, a common question is the tax treatment.

Equity loans do not attract interest in the normal way, there are no regular monthly payments. One UK lender, funded by USA equity house JC Flower & Co. (a leading financial services investment company with funds in excess of £5billion) has entered the UK market and others may follow. Their return on investment is earned when the loan term expires or or sale or refinance of the property, whichever is sooner. Their return is capital plus a share in capital appreciation equal to double their investment. For example, if they provide top up finance of 10% of a property value their return with be 20% of the increased capital value plus their investment when the funding is redeemed.

As you may know, I was previously a former commercial finance broker. When I was practising I was renowned for digging into complex funding, tax and legal structures to explore opportunities and threats which others may never have considered.

Note to all – I no longer provide advice and this post must not be treated as advice.

The tax treatment of the redemption of BTL equity loans will be very interesting.

Let’s use this example. Equity loans can sit over and above traditional interest bearing mortgages but for the sake of simplicity I have based the following example on equity funding only.

Property value at outset £100,000
Equity loan at outset £20,000

Property value at sale £200,000
Capital gain £100,000 (or is it and if so how is it shared? – see below)
Equity loan capital repaid £20,000
Profit on Equity loan to lender £40,000

Now does the £40,000 profit on the equity loan to the lender reduce the owners capital gain to £60,000 or is the owners gain still treated as £100,000?

The lender operating the first of these schemes has already stated they will bill their return as interest at the point of loan redemption. However, that’s not to say HMRC will see it that way, only time will tell. Therefore, my suggestion to all landlords considering this type of finance is to plan for the worst and hope for the best in terms of tax treatment. As has been proven many times, the law says you can call something pretty much whatever you like but case law or legislation will determine what it really is. Case in point, advance rent or deposit? – see Johnson vs Old

So will profits made by equity lenders need to be used to offset rental profits? If so there could be a substantial paper loss created in the year of redemption. Unused losses may be rolled forward, assuming losses are made, but such losses are only offsettable against future rental profits. No problem, in fact potentially very advantageous, IF you continue to make rental profits going forward. However, if this was your only property you may be stuffed by having to pay CGT on the full £100,000 of gain and not being able to utilise the carry forward losses. Note that rental losses can not be used to reduce other taxable income.

I can’t see HMRC allowing landlords to choose how they apply the lenders return to suit their individual circumstances, i.e. as either interest or a share of capital gain,  but we can live in hope, not that that’s a good strategy of course! If HMRC do allow a choice to be made that would be utopia from a tax planners perspective 🙂

What I would suggest to all considering equity loans is that they should plan for the worst case tax scenario and hope for the best case tax scenario. In other words, make decisions based on the worst case tax scenario and if that works then fine. Obviously there are many other aspects of the deal to consider too which is why I am an advocate of taking professional advice as opposed to taking a short sighted approach and simply jumping into deals unadvised just to save initial fees.

If you are a portfolio landlord who makes good rental profits then treating the lenders return as interest could be extremely tax advantageous if the tax regime remains as it is today. This is because income tax rates are greater than capital gains tax rates for higher rate tax payers.

Therefore, for landlords who will continue to make rental profits, post redemption of their equity loans, this is particularly attractive in my opinion. At worst, if HMRC decide to treat the lenders returns as capital gains, landlords will pay a lower CGT bill and not be able to offset interest. For a landlords with no ongoing rental profits post redemption of an equity loan, having the lenders return treated an interest charge is highly unlikely to be attractive whereas having the returns treated as capital gains will be far better for them.

If, of course, your equity loan is secured against your private home then no CGT is payable on sale anyway.

Tax Treatment of Equity Loans for Buy to Let Landlords

Tax is not the only consideration.

I have listed 11 good reasons for considering the product and 9 downsides in my main post about equity loans. That’s not to say that everybody should think equity loans are the best thing since sliced bread just because my list of pro’s and cons is 11 vs 9, it doesn’t work that way. The reasons for NOT doing something can be very different to reasons FOR doing something, they are not necessarily like for like considerations. For example, I also prefer a strategy of high gearing combined with high liquidity over a low gearing strategy because that’s what suits me and my attitude to risk. It does not mean that people who prefer a different strategy are either wrong or right, it just proves we are all different, hence we have other preferences such as careers, holidays, cars, films, food and where we live.

For further information and discussion about equity loans please CLICK HERE.


Venture Capital for Buy to Let Landlords Latest Articles

Until now it has not been possible for private landlords to access venture capital but times are changing.

Historically the only form of funding for buy to let investors has been mortgages, i.e. debt based finance where the returns for the provider comprise of fees and interest.

In the world of corporate finance it is common for business funding to comprise a mixture of both debt and equity finance.

Equity finance is different in that the provider makes a return by sharing profits, often when the business or asset is sold or refinanced. This form of capital is also know as mezzanine finance, private equity and venture capital amongst professional corporate advisers. Venture Capital for Buy to Let Landlords

A respected mortgage lender has now entered the  provide equity finance market and will be offering it’s products to private landlords. The lender will take a legal charge over rental property to protect their interests in much the same way as a traditional mortgage lender does, however, their charge will rank second to that of a traditional mortgage lender, thus enabling a mixture of debt and equity funding. A typical structure based will be:-

  • 65% debt on a traditional buy to let mortgage secured by first charge
  • 20% buy to let equity loan secured by second charge
  • 15% owners own funds

No interest or monthly repayments are made on the buy to let equity loan. The return for the lender comes when the property is sold or refinanced. The equity loan is repaid and the lender takes a 40% share of any capital gains. For example, if the property had increased in value by £100,000 the lender would take £40,000 of the profit plus return of capital. If the property had decreased in value the equity lender would still get their capital returned but would take 40% of zero profit, i.e. a zero return on investment.

For most buy to let landlords this very radical alternative to traditional mortgage financing alone will take some thinking through. There are pros and cons which I have thought through in quite some detail. For further details please CLICK HERE


Renting by the room – a FREE guide to maximising profits Landlord News, Latest Articles, Property News

Renting By The RoomA new ebook has been released by Spare Room and is available to download as a PDF via Property118 free of charge. It’s called “Renting by the Room – A Guide to Maximising Rental Profits”.

The media has a fascination with house prices, and together with Property Investment gurus and Estate Agents, spend a lot of time talking about the money to be made from investing in property. However, they rarely mention the single biggest factor in maximizing your return on investment – renting property by the room.

Why?

The truth is that renting by the room can bring in two or even three times the income of the same property let as a single unit. So why does it feature so rarely on property programmes or investment research reports?

Perhaps there’s a belief that this type of letting is too complex for amateur landlords to handle? Maybe they want to keep the juiciest returns for themselves? Either way, it’s high time someone challenged the status quo, and revealed why savvy property investors and landlords are getting into renting by the room.

SpareRoom’s Guide to Renting by the Room reveals:

  • The Origins of Generation Rent
  • The Growth of Flatsharing
  • The Benefits of Renting by the Room
  • Where the Demand for Shared Housing is strongest, around the UK
  • … as well as a Case Study of a Property Expert who only rents to sharers, and a Special Offer to get discounted advertising on SpareRoom.co.uk

To download your free copy, simply enter your name and email address below.

Download the FREE Guide to Renting by the room


DSS Tenants – another issue Buy to Let News, Guest Articles, Guest Columns, Landlord News, Landlords Stories, Latest Articles, Lettings & Management, Property Investment News, Property Investment Strategies, Property News

DSS Tenants - another issueThe good thing about being a landlord is that I not only generate a fantastic monthly income from my property investments but I also have the power to make a positive impact on the lives of some vulnerable people “DSS Tenants” living in my community by providing them with a home (when other landlords might not).

Continue reading DSS Tenants – another issue


Open Letter to Grant Shapps from Farah Damji Guest Columns, Latest Articles

*Property118 is not in any way aligned with Kazuri nor Farah Damji, but we believe questions should be raised about the funding being poured into Shelter and Crisis to work with private landlords when they have done and continue to do so much to damage the reputation of the Private Rented Sector. We believe this matter is of interest to all landlords and we thought it was worth bringing to your attention the actions which Ms. Damji is taking to block this allocation of public funds.*
*A response from Crisis to the content of this open letter has been published in full in the comments below.*

Dear Mr Shapps,

I write in dismay about the additional funding being given to charities such as Crisis and Shelter next month to “help end homelessness” in the private rented sector (PRS). This is referred hereto on the Crisis PRS website:

The Crisis PRS Access Development Programme funds new community based services that help single homeless people find and sustain good quality accommodation in the private rented sector (PRS). It builds on Crisis’ history and expertise in PRS solutions to homelessness and represents an investment of over £10m of DCLG funding over a three year period. Continue reading Open Letter to Grant Shapps from Farah Damji


Property Analysis – Part 2 – How it can save you thousands! Guest Columns, Property Investment News, Property Investment Strategies

Missed Part One? Click to read Property Analysis – Part 1

Mortgage Cap Rate (Interest Only) = Net Annual Rental Income + Annual Mortgage Cost / Current Mortgage Outstanding

Expressed as a percentage this indicator will tell you the maximum interest rate you can sustain and still break even. Obviously the higher the number the greater the safety net you have against rate rises. Any property with a figure around 5% or less needs looking at to see where either cost can be cut or the rent increased. Continue reading Property Analysis – Part 2 – How it can save you thousands!


Property Analysis – Part 1 – How it can save you thousands! Guest Columns, Property Investment Strategies

Whether you own one or one hundred properties you must monitor the performance of each property on a monthly and annual basis. Before you can do this though, you need to have a goal or target in mind as to the performance you wish to achieve with each property over a specified time period, whether 1 or 10 years. Continue reading Property Analysis – Part 1 – How it can save you thousands!


Seven Tenants Chasing Each Home for Rent Latest Articles, Property Market News

tenant panel

"7 tenants are after each property according to Countrywide"

Up to seven new tenants are competing to rent each home- and the gap between available properties and the number of tenants who can’t find a home is widening.

The number of tenants seeking a home has jumped by 15% during the three months ending June 30 compared with the same period last year, according to Countrywide, the UK’s largest letting agent.

On average, rental properties are on the market for just 13.3 days before a tenant signs up.

Family homes with three or more bedrooms are growing in popularity with tenants and now account for four in every 10 rentals – up from around a third of all rentals last year.

Countrywide suggests this is due to homeowners who can’t sell are moving and renting while letting out the home they own behind them.

John Hards, co-managing director of Countrywide Residential Lettings said: “The latest findings are an interesting insight into recent changes across the lettings landscape where both demand and supply has been affected by a subdued sales market.

“Feedback from our branches shows a lot of unsuccessful sellers have chosen to ‘let-to-move’, tempted by the prospect of a quicker return on investment by letting out their property. Interestingly, some sellers may also be looking to ‘rent-to-move’ whilst they wait for both a realistic offer on their unsuitable property and their ideal home to come along at the right price.”

Around 40% of buy to let homes in London are two-bed properties letting in 12 days – four days quicker than the same time last year.

In the West Midlands, 7.2 tenants are chasing each property up for rent, while in the North West, the number of tenants seeking to rent is 3.9 per property.

In Scotland, 75% of homes for rent have one or two bedrooms, while at the opposite end of the scale in London, 40% are two bed homes.


Landlords could do more to save money on taxes say Paragon Latest Articles, Tax News

paragon logoMany landlords surveyed by Paragon could save money on tax, they’ve found not all were as efficient as they could be.

Of those questioned, less than half are claiming their advertising (45%), transport costs to visit your property (49%) and on any energy efficiency improvements (41%) as tax allowances. Continue reading Landlords could do more to save money on taxes say Paragon


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