Taxation strategies for capital raising on a BuyToLet basis for retirement

by Mark Alexander

21:50 PM, 6th August 2012
About 7 years ago

Taxation strategies for capital raising on a BuyToLet basis for retirement

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Taxation strategies for capital raising on a BuyToLet basis for retirement

It is quite rare for me to share taxation strategies here in full on my blog, especially taxation strategies for capital raising purposes which I’ve not used personally yet (but intend to). However, following an email from a reader called Mike today I will make an exception on this occasion. I love to share my strategies bit by bit but I often miss out some key elements, either to encourage further conversation or to provide enough intrigue for my readers to want/need to contact me personally. I explain why I do that here.

Mike wrote to me as he is currently going through a tax investigation and from his email it is quite aparent that he has a decent understanding of landlord taxation. Mike’s email raised questions regarding an article I recently published about “Partial Exit Strategies for landlords“, and in particular the taxation strategies for capital raising as referred to in that particular article.

The article referred to above was based on a scenario from another reader who had emailed me. His mother had purchased a property 43 years ago which is now worth £650,000. Mike estimated that she would have paid around £2,000 for it.

As Mike rightly pointed out in his email, if the property was refinanced to raise additional capital then only the interest on the first £2,000 of the loan (i.e. up to the initial purchase price) could ordinarily be offset against rental profits. The obvious exception to that being if the additional capital is reinvested into the BuyToLet business, to purchase more properties for investment purposes for example.

There is, however, a way around this for married couples which I discovered back in 2006. I shared this whilst presenting a CPD (Continued Professional Development) seminar for Norwich accountants. I believe the professional body was the AAT (Association of Accounting Technicians) but it may have been the ACCA (Association of Chartered Certified Accountants). My presentation was entitled “Milking the BuyToLet” and was subsequently shared as a briefing to members of at least one of the professional accountancy bodies .

Milking the BuyToLet

There is no capital gains tax (CGT) on transfers of property between spouses. Stamp duty is payable though unless you are getting divorced and the transfers are court ordered. Transfers between spouses (or Civil partners) do not affect the base cost of a property for CGT calculation purposes when it is eventually sold to a third party (i.e. not a spouse or civil partner) but a strategy of selling properties between spouses can be used to good effect for income tax purposes.

Let’s play this out by way of the example referred to in my previous article and Mike’s email. Let’s say Mrs X purchased her property 43 years ago for £2,000 and it is now worth £650,000. Let’s also assume that Mr and Mrs X are married.

Mrs X can sell her property to Mr X for £650,000 as a CGT exempt transfer between spouses, even if she only married him yesterday. Mr X can borrow money to fund the purchase, even if he is 70 years of age too – see this article by Neil Patterson – Mr X could even be up to age 75.

The new loan taken by Mr X is being used to purchase a BuyToLet property and therefore interest on that loan may be used to offset against rental profits.

Result = capital raised without incurring CGT whilst being able to offset 100% of the loan interest against rental income.

Legal note – I am now a retired adviser so this article should not be constituted as professional advice. I am sharing this information to demonstrate the importance of having good professional advisers. If you would like me to refer you to my own trusted professional advisers please feel free to email me at mark@property118.com

If you do choose to email me, please provide an outline of your circumstances,  the more information you can provide the better please. The quality of the information you provide will affect the quality of my recommendations and I do like to recommend the right professional adviser(s) first tme around wherever possible as I don’t like to waste anybodys time, especially yours, my professional contacts or my own.

By all means leave comments or further questions in the comments section below too. I prefer to engage online as this avoids me having to answer several emails asking the same questions over and over again.

We now have a complete section dedicated to articles, Q&A’s and discussions regarding exit strategies. For details please

Exit Strategies for BuyToLet Landlords



Comments

Joe Bloggs

22:21 PM, 7th August 2012
About 7 years ago

interesting, but bit extreme!

12:19 PM, 8th August 2012
About 7 years ago

And if the property being transferred was already a BTL is the CGT still zero. I recall an article stating that there was no roll over on CGT - unfortunately I do not know what that means (!) - but either way I wondered.

Mark Alexander

12:28 PM, 8th August 2012
About 7 years ago

Transfers of assets between married couples and civil partnerships are CGT exempt regardless of asset class so in answer to your question, YES.

Roll-over relief is something different completely. If you buy an office for £100,000 and then sell it for £200,000 you have made a capital gain and tax is due. However, if you use that £200,000 to buy another office, or any other form of commercial property for that matter, you can defer payment of the capital gain tax by "rolling over" the gain into the next property. You can't do that on residential property, hence there is no CGT roll-over on BuyToLet. I hope that answers your question.

13:30 PM, 8th August 2012
About 7 years ago

I see. Ta. I was thinking wrongly along the lines that 'roll over' was a more generic term determining whether cgt could or couldn't be written off against normal losses in future years - such as if the new house above was in a void - I guess that's just normal tax reclaim. Not sure what I was thinking really!
I guess I just thought that BTL might have weakened any 'CGT friendly' case generally and so in the above case for instance btl may have voided the exemption between spouses. But as you say even the 'CGT friendly' roll over you highlighted a couple of weeks back is broken for all resedential in general anyway and not just btl - so btl wouldn't seem to be a special case in the cgt pot. Except when you sell it as a non prime residence to someone outside the family obviously.

4:04 AM, 13th August 2012
About 7 years ago

It was my understanding (from a property tax seminar and tax books) that you could refinance up to the value of the property at the time it was brought into the BTL business and all the interest could be used as a property expense, no matter what the funds were used for. Paragraph 45700 of the HMRC Business Income Manual was the reference given in the tax book.
Please could you comment on this? Thanks.

Mark Alexander

7:37 AM, 13th August 2012
About 7 years ago

Hi Chris, yes that's correct. If you purchased a property back in 1990 for £30,000 you can borrow up to £30,000 for any purpose. However, that property may now be worth £150,000. If you want to borrow more than £30,000 for any purpose (say £100,000 to buy a holiday home or to fund retirement) and you still want to set off 100% of the interest against rental income then this strategy of selling between spouses could be the ideal solution.

14:42 PM, 15th August 2012
About 7 years ago

Be very careful if the property was every your main home, as you stand to lose out on a lot of CGT relief if you put it into your partner’s name.


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