BTL mortgage advice please!

[Trev16v]

Hi all,

The wife and I have had our first house for about five years. It is on an Abbey life tracker mortgage at a very good rate (+0.49), which has an offset savings account.

We wish to buy another house soon, preferably this year.

My wife became ill last summer, and because of this we had a claim admitted from our critical illness insurance. This money is sufficient to completely cover both the oustanding balance of our house, and provide a reasonable desposit for a new house, too.

We have always wanted to be able to keep our first house and let it out once we bought our new house. Before the insurance payout, clearly we would have had to have used a BTL mortgage. The intention would be to port our existing mortgage over to the new house due to the good rate (which I know we would never get again). But with our circumstances having changed, I now see a range of options:

1- Pay off the balance of our present house completely. When we move house and let our first house to someone, all rental income will be 'profit' and subject to tax. We only ever have one mortgage, i.e. our residential Abbey one, which would be ported to the new home.

2- Don't pay off the balance completely. Instead, get a BTL mortgage with something like a 60% LTV in order to achieve the best rate possible. (I need to check the C&G website again, but off the top of my head I think their BTL mortgages are probably going to be 4 or 5ish % at the very best). Arrange the mortgage so that the rental income only just covers it (or just falls short of it) so that there's technically no profit from the house. This would be a repayment mortgage. The money that we have kept by not paying off the balance would instead all be shoved into the offset savings account with the residential Abbey mortgage (which would have been ported to the new house).


Our financial advisor suggested option 2 because apparently it may be more tax efficient. I am a contractor and I am already going to hit the 40% bracket if I take out all the dividends I'm entitled to this year. So presumably I will be hit very hard if I start having additional income from a BTL, too.

How about if the house balance was paid off and there's no BTL mortgage, and the rental income goes into my wife's name? Fortunately she is recovering well and is still working. She's not earning much (less than £20K). So, could it be most 'efficient' to have the house balance completely paid off, and all income going to her, with her hopefully / probably keeping within the lower tax bracket?

She is not currently a second shareholder of my Limited Co., but it's something I've discussed arranging with Brookson.

If and when we come to sell the 'BTL' house in the distant future, would it always be subjected to capital gains tax? Is the capital gains tax affected by how the house is paid for, i.e. whether we pay for it outright using our money, or paid off from rental income?

I shall be seeking further advice from the IFA but I'd just be interested to have opinions from on here too, as I know a few of you have BTL properties and are far, far more switched on than I am when it comes to tax issues!

Thank you

[Clippy]

Hi all,

The wife and I have had our first house for about five years. It is on an Abbey life tracker mortgage at a very good rate (+0.49), which has an offset savings account.

We wish to buy another house soon, preferably this year.

My wife became ill last summer, and because of this we had a claim admitted from our critical illness insurance. This money is sufficient to completely cover both the oustanding balance of our house, and provide a reasonable desposit for a new house, too.

We have always wanted to be able to keep our first house and let it out once we bought our new house. Before the insurance payout, clearly we would have had to have used a BTL mortgage. The intention would be to port our existing mortgage over to the new house due to the good rate (which I know we would never get again). But with our circumstances having changed, I now see a range of options:

1- Pay off the balance of our present house completely. When we move house and let our first house to someone, all rental income will be 'profit' and subject to tax. We only ever have one mortgage, i.e. our residential Abbey one, which would be ported to the new home.

2- Don't pay off the balance completely. Instead, get a BTL mortgage with something like a 60% LTV in order to achieve the best rate possible. (I need to check the C&G website again, but off the top of my head I think their BTL mortgages are probably going to be 4 or 5ish % at the very best). Arrange the mortgage so that the rental income only just covers it (or just falls short of it) so that there's technically no profit from the house. This would be a repayment mortgage. The money that we have kept by not paying off the balance would instead all be shoved into the offset savings account with the residential Abbey mortgage (which would have been ported to the new house).


Our financial advisor suggested option 2 because apparently it may be more tax efficient. I am a contractor and I am already going to hit the 40% bracket if I take out all the dividends I'm entitled to this year. So presumably I will be hit very hard if I start having additional income from a BTL, too.

How about if the house balance was paid off and there's no BTL mortgage, and the rental income goes into my wife's name? Fortunately she is recovering well and is still working. She's not earning much (less than £20K). So, could it be most 'efficient' to have the house balance completely paid off, and all income going to her, with her hopefully / probably keeping within the lower tax bracket?

She is not currently a second shareholder of my Limited Co., but it's something I've discussed arranging with Brookson.

If and when we come to sell the 'BTL' house in the distant future, would it always be subjected to capital gains tax? Is the capital gains tax affected by how the house is paid for, i.e. whether we pay for it outright using our money, or paid off from rental income?

I shall be seeking further advice from the IFA but I'd just be interested to have opinions from on here too, as I know a few of you have BTL properties and are far, far more switched on than I am when it comes to tax issues!

Thank you

You obviously haven't been keeping up to date with the housing market recently.

Suggest you research that first before going any further.

[s2budd]

I am in the same position and am having the same thoughts.
My mortgage is an offset and has been "parked" at £1,000
I do not have enough cash to buy another house outright so I would require a mortgage but I do like the idea of not having a mortgage on the rented property because it just seems less messy.

Thoughts please.

[BrilloPad]

Is anyone on this forum actually seriously thinking of buying a house NOW?

Unless it is a real real bargain then forget it.

[Liability]

Is anyone on this forum actually seriously thinking of buying a house NOW?

Unless it is a real real bargain then forget it.

BP

It may sound absurd but many are buying.

A close friend of mine bought a few repo's in October and is buying more imminently around Leicester. Seems there is demand their for BTL and also refurbing and selling. His initial one he made a net profit of around 13k in as little as 9 weeks.

All about Bargains I guess - right now the 2 and 3 bed places will be the ones that get off the slow start and sell - if we see any sign of minute recovery.

[slackbloke]

Firstly, your option 2 does not add up correctly. You said there would be no profit, the mortgage cost would only just be covered by the income. However, you also said it would be a repayment mortgage. Those two statements are not compatible. If you have a repayment mortgage, the capital repayment part cannot be offset against the rental and there would be taxable income.

Secondly, and more importantly, why are you not income shifting? if your wife earns less than £20K she has circa 20K worth of tax allowance that would allow a tax free dividend payment.

If you put the let property in your wife's name she could receive the income and as she is under the higher threshold there would be an advantage, but she would also then have to complete SA.

Your much better off dividing the shares and income shifting. Get a interest only mortgage on the let property and put it in your name.

Regarding the let property, it will be subject to CGT liability. This will be mitigated by the fact you lived in the property (three years of rental before sale will avoid any tax). How you pay for the property is irrelevant (as is any form of re-mortgage etc). For the purposes of CGT, what matters is the price you paid for it and the price you sold it for, and then any other applicable allowances.

[scooterscot]

The wife and I have had our first house for about five years. It is on an Abbey life tracker mortgage at a very good rate (+0.49), which has an offset savings account.

My wife & I have this mortgage on our BTL. Like you it was our first house then we let it without informing the bank. Later (a few months) we did tell the bank and they converted it. Their main caveat was as long as the mortgage was self funding they did not mind.

That was about 2-3 years ago. Today the mortgage payments are half the rental payments.

[DimPrawn]

BP

It may sound absurd but many are buying.

A close friend of mine bought a few repo's in October and is buying more imminently around Leicester. Seems there is demand their for BTL and also refurbing and selling. His initial one he made a net profit of around 13k in as little as 9 weeks.

All about Bargains I guess - right now the 2 and 3 bed places will be the ones that get off the slow start and sell - if we see any sign of minute recovery.

Yes, buy now. Property prices are set to rocket!

http://www.telegraph.co.uk/finance/e...e-in-2003.html

[BrilloPad]

Yes, buy now. Property prices are set to rocket!

http://www.telegraph.co.uk/finance/e...e-in-2003.html

Interesting they expect prices to fall 40% from 2007 peak (down 20% so far) but will be 30% down in 5 years. They dont say when 40% down point to be.

Of course, if you buy now at 40/50% down from 2007 peak (if you can) then you should be safe. A friend of a friend did so recently with a NR repossession.....

[Trev16v]

Thanks for the points raised.

You obviously haven't been keeping up to date with the housing market recently.

Suggest you research that first before going any further.

Be assured I certainly been keeping up to date with what house prices have been doing, and read countless predictions on what it's proposed to do over the next so many years. Some seem to say we'll be at the bottom towards the end of this year; some say we have many years to go yet. This is a whole separate debate really and I've read a number of threads about the housing market on here. I do totally take on board your comment. We won't rush into anything, and we'll not buy until we feel it really is the right time. However, I just want to be prepared for what we're going to do, and I'd like to work out well in advance what to do with the current house that we're going to let out.



Responding to slackbloke's comments:

Firstly, your option 2 does not add up correctly. You said there would be no profit, the mortgage cost would only just be covered by the income. However, you also said it would be a repayment mortgage. Those two statements are not compatible. If you have a repayment mortgage, the capital repayment part cannot be offset against the rental and there would be taxable income.

Understood. Thank you.

I agree that I already should be income shifting. It is something that I am in the process of arranging through Brookson. Haven't been contracting for all that long but that's no excuse - I should have got my finger out of my hole and arranged it a year ago. Fortunately, a lot of 'my' money remains in the business account which I continue to roll over and hence I've not been stung on higher rate tax yet.

Get a interest only mortgage on the let property and put it in your name.

Okay, so I understand you're advising is that I do NOT have income from the let house going into the wife's name, but rather it should all come into my existing Ltd. company, and I use income shifting to avoid the higher rate tax. Doing it this way, as opposed to the wife having it as a separate business income for her, would avoid her having to start doing SA Tax Returns.

The point I would like to clarify a little more is your suggestion of having the let house on an interest-only mortgage. Or, indeed, why have it on a mortgage at all, when it's possible for us to pay off the house outright. I think that 's2budd' is pondering this, too.

The options seem to be:

- Pay off house outright. All income (say, 500 or 600 rent a month) is profit. I could use income shifting to rake this extra cash in per month and yet still avoid being hit heavy on tax.

- Use an interest only mortgage on the house. At current rates, on interest only, the mortgage would be a bag of peanuts per month (but I certainly acknowledge it could shoot right up again in the future). So, there would still be profit each month. I reckon the profit would probably be something like 300+ per month after interest only mortgage payments. The advantage of this that I can see is that we don't sink a huge amount of the money we have into the house; instead, that money remains in our residential mortgage offset account, and it's money for us to use to improve our new house and so on. Disadvantage? We have the mess of having a BTL mortgage as well as our current Abbey mortgage. And our rental income is going towards mortgage interest, which *could* one day shoot up again.


I suppose the question I'm trying to ask here is this - if I stick the house on a BTL mortgage as opposed to just paying it off outright, then in the long run, would I be much worse off having had to use much of the rental income to pay the mortgage interest? Or, if the house is paid off outright, can I actually find myself even worse off because of 100% of the rental income being profit?