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  • Buy-to-Let

    Deleveraging could be a mistake



    Don't let the tax tail wag the investment dog.

    It seems to be the perceived wisdom that due to S24 investors should deleverage.  I disagree with this approach.  If you pay down your mortgages you will pay more tax, not less.

    The attractiveness of BTL for me is the capital gains, which are magnified with leverage.  Even very moderate HPI of 2% per annum if leveraged at 75% LTV will give you 8% return on investment and that is without even allowing for rental income.

    If your concern is that you will have insufficient cashflow with raising mortgage rates and taxation then you need to improve your income.  Whether you do this by buying more property depends on your individual circumstances.  Personally I have no plans to buy more BTL but am happy to allow inflation to erode my debt and LTV over time.

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    Interesting Paul

    A close friend has a property on the market for £450 k,with an existing mortgage of £160k

    If he sells,capital gains hits at 28%,but he could re mortgage and let for 5 yrs at a better rate, and have another £100k in the bank, tax free.

    People that agree with Section 24 would say.

    How can you expect to draw an additional £100k tax free, and then offset all  your mortgage interest payments as a business expense for £260k

    How is that right?

    Yours and others thoughts ?

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    It depends how much he paid for it. 

    You can withdraw any capital you put in tax free as all you are doing is withdrawing your own cash.  So if he paid £260k and only has a £160k mortgage then he will get tax relief at the basic rate for the extra borrowing.  He will also get any HPI on the full £450k value over the next 5 years or however long he decides to keep the property. 

    Seems a no brainer to me as long as he has sufficient cashflow or cash reserves. 

    However, if you think property values are going to be lower in 5 years time than now this would be a bad decision.

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    I think it was £225k.

    Property values,lower,higher,who knows !

    Historically,if there is a crash,it soon recovers,that's fine,providing you can hang in there.

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    I went into BTL to provide an income not for capital gains, though I used LTB to hang onto my flat in Reading for the likely capital gains from Crossrail.

    Since it doesn't look like there will be much capital growth for the flat in the near future and the low yield has dropped lower  I will be selling it as planned next year,  Since my pensions will push me into HRT regions I will be using the proceeds to pay off mortgages on properties in my own name.  That should increase my income by £2k oa whilst making  much of it safe from interest rate rises.

    I could get even more income by buying 4-5 more properties, but  have chosen the simpler safer route.

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    Now is the time to deleverage as asset prices are all over blown.

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    Paul your strategy is similar to mine - Letting inflation take care of my debt.

    My plan has always been to never sell any of my rentals and regularly remortgage to release funds from the appreciation.

    When I die, so will my capital gains tax bill and my life insurance policy will take care of the outstanding mortgage.


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    the continual remortgage brings up an interesting question that I haven't yet got a clear answer to. 

    Before S24 the tax relief was simple, you could claim tax relief up to the amount you initially paid for the property.  Since S24 this is far less clear as tax relief actually totally ceases and instead is replaced by a tax credit of 20% of the mortgage interest.  I have not seen anywhere that this is still limited to the amount paid.  If it is now a straight tax credit it could well be that S24 has a hidden silver lining.

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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.

    I suspect 99% landlords do not know this. Remember ignorance is not above the law.

    I know 2 investors being made to pay back over 10 years of "illegal" mortgage interest claimed as expenses.

    So there is a limit to releasing equity. This is a sitting time bomb and HMRC knows most landlords do not know this.

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    I fully understand the system of only the original purchase price being eligible for tax relief but my point was that since S24 I don't believe this still counts.  There will now not be any tax relief but with the tax credit against interest it doesn't state only interest against original cost.

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    Probably need a tax accountant to clarify this point.

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