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  • Buy-to-Let

    Deleveraging could be a mistake

    If you remortgage and use the cash to buy more property it’s not a problem you can claim I’m sure of that

    if you use the cash to buy a gold ring I’m not sure you can claim relief

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    Learn Change and Adapt ?????

    All comments are for casual information purposes only. If you wish to rely on any advice I have given please ensure you obtain independent specialist advice from a third party. No liability is accepted for comments made.

    You are spot on, but I come across many landlords that thought the equity release is tax free money they can use to buy anything they want.

    Equity release from property is not free money to use, it's loan money with some restriction of use.

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    It makes sense to me otherwise you could remortgage a house and use the cash to buy your home and get tax relief

    a tax advisor would clarify it

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    Learn Change and Adapt ?????

    All comments are for casual information purposes only. If you wish to rely on any advice I have given please ensure you obtain independent specialist advice from a third party. No liability is accepted for comments made.


    You need to consider the wording of S24 (emphasis added):

    24Relief for finance costs related to residential property businesses

    (1)ITTOIA 2005 is amended in accordance with subsections (2) to (6).

    (2)After section 272 insert—
    “272ARestricting deductions for finance costs related to residential property

    (1)Where a deduction is allowed for costs of a dwelling-related loan in calculating the profits of a property business for the tax year 2017-18, the amount allowed to be deducted in respect of those costs in calculating those profits for income tax purposes is 75% of what would be allowed apart from this section.

    274ATax reduction for individuals

    (1)Subsections (2) to (5) apply if—

    (a)an amount (“A”) would be deductible in calculating the profits for income tax purposes of a property business for a tax year but for section 272A

    This section goes on to "explain", if you can follow it, the way in which the 20% deduction is calculated but it seems to me that the answer to the question is that the 20% is only given in relation to those finance costs that would previously have been allowed as a deduction i.e. excluding interest on loans in excess of the original purchase cost and not used for business purposes. That's my interpretation, please don't rely on it!


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    Paul, thanks for this excellent post - its got me thinking at a time when I am just starting to develop my BTL houses in London into flats with a view to selling off enough to pay down my debt on however many I can still keep debt free - and free up enough cash to get on with some buy to develop and sell.

    If i can free up enough cash to do this by remortgaging tax efficiently then I keep my assets, delay (possibly forever, CGT - IHT is a different conversation). As you say, its about my view of future prices and getting the balance right.

    I am very aware of the tax rules you mention around swapping debt for equity up to the price paid - and indeed the same rules permitted debt interest deductions for genuine capital improvements. As for how that works under the new s24 tax credit calculations - that certainly needs professional advice - but I can only imagine that the principles determining which level of debt qualifies for a deduction (now a credit) remain unchanged. But you never know if an unintended loophole has crept in and so it is also an excellent point to raise.

    Thanks again.

    JC


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    "Not many realise this, if you keep releasing equity, you are not able to claim any of the mortgage interest at all (no relief applicable) on the loan larger than your original purchase price."

    That's really interesting, I have not been in the property business long enough to have re-mortgaged any of my buy-to-lets.
    But that means that people who have consistently re-mortgaged their buy-to-lets over the years, will be less impacted by section 24, as the consistent remortgaging would have made a large part of their mortgage interest not allowable as an expense.

    So section 24 will not affect them as much as someone who has never re-mortgaged their buy-to-let. 

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    It depends what your strategy is overall.

    I see Property as a "Store of Wealth" i.e. make money elsewhere and Property is a safe place to park cash. For example if I had six figures cash and the bank holding it went bust, then the cash goes up in smoke, or shares in Lehman Brothers / House of Fraser etc. could also go up in smoke.

    Whereas bricks and mortar can be physically touched,  so an unencumbered Property can't be wiped out on a computer screen.

    Therefore I Deleverage as a place to park any surplus.

    That's the only reason I stay in Property,  it's a safe commodity.

    In terms of making money there's much better investments.

    Where I do agree with you is don't let the tax tail wag the dog, so if that's your sole reason for Deleveraging then perhaps would be a mistake.

    As always,  it's down to individual circumstances,  strategy and risk profile.

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    There is no one size that fits all with this

    each of us will have a view

    i personally have diversified and changed

    A number of things

    I use pension now aginst s24 and isa

    i don’t borrow any more because of taxation


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    Learn Change and Adapt ?????

    All comments are for casual information purposes only. If you wish to rely on any advice I have given please ensure you obtain independent specialist advice from a third party. No liability is accepted for comments made.

    I haven't deleverage

    I`m in  the Paul and Adam camp

    I prefer surplus cash to be in my bank not the lenders then i have multiple options

    One of those options is to invest the surplus to create more wealth than deleveraging  would save

    With a loan rate of only 2 or 3% this is relatively easy to achieve

    CGT dies with me and life insurance can pay off some mortgages . I may increase that

    Rental income day to day keeps the whole show happily on the road.

    Inflation has already and will continue to silently reduce my exposure to debt.

    That reduction is  magnified  due to leverage

    Likewise capital growth is magnified due to leverage

    The equity gap grows larger by doing absolutely nothing once you have done the hard work

    The rumblings underneath will always be there of course

    But they come and go

    I am not phased really whether house prices go up 10% or down 10% in one isolated year

    Over 20 years then 40 years I believe house prices with double, then double again

    I have seen this happen historically so take comfort from that going forward

    Even if its half as good as it has been it will be great

    A million of debt in 40 years will seem a lot lot less and will be a lot lot less in real terms

    Time will look after you as long as you structure it right and hit the right balance and don`t wobble

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    Jonathan Clarke. http://www.buytoletmk.com

    In the past I would have agreed with you 100%

    the wobble today is govt policy

    none of us know what will happen next

    and that’s the issue

    we only inhabit the world of BTL with the will of the government

    if tax relief is withdrawn 100% could you manage and survive

    I now factor in no tax relief in my bussinss plan

    that’s why I don’t borrow

    the largest cost to a landlord is interest ofset aginst turn over

    I just don’t trust govt and that’s my wobble

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    Learn Change and Adapt ?????

    All comments are for casual information purposes only. If you wish to rely on any advice I have given please ensure you obtain independent specialist advice from a third party. No liability is accepted for comments made.