Loan

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    Loan

    Hi, before I speak to my accountant I was hoping if I could have a rough ideal, tax wise of the following.
    My mother in law has seen a bungalow but the sale of her current house has fallen through, I was thinking about rising a 160k mortgage against a 250k b2let I own outright and lending her the money to buy the bungalow the legal side is covered and she would have to cover my costs etc, but my concern is the tax side I don't want to look a idiot in front of my accountant as its not my best subject.

    I would be grateful for any pointers.
    Thanks

    #2
    As you would not be using the money raised for your rental business, you could not claim any of the costs or interest payments against your tax bill.

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      #3
      I thought that, I was thinking more along the lines of gifting etc I know I won't make a penny. I just don't want to get stuff for something.

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        #4
        Great idea, we did similar for my parents. Remember she will have to pay the added 3% stamp duty, reclaimable when you sell the first house within set time limit.

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          #5
          Owning the B2Let property outright means all of the rental profit is taxed at 28% or 40%.

          When you raise a loan on the B2Let, the loan interest is not an allowable expense against the rental income. But 20% of the loan annual interest corresponding to the market value of the property at the start of rental letting , can be used to reduce the tax payable on the rental profit.

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            #6
            Originally posted by Mrs Mug View Post
            As you would not be using the money raised for your rental business, you could not claim any of the costs or interest payments against your tax bill.
            I thought we were allowed to withdraw our equity from a btl property and charge 20% of the interest payments on the finance borrowed.

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              #7
              I thought you could only do that if the money was being used for the rental business, not just to buy a new Rolex.

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                #8
                The BTL is inside the OPs rental business, any interest on a mortgage on that property is linked with the business, it doesn't matter what the money released by the mortgage is used for.
                A new Rolex bought with the equity released wouldn't change the tax position.

                When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

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                  #9
                  Really, so I can remortgage my entire portfolio, take a few million tax free to spend on Lamborghini's and claim tax relief on the interest payments ?
                  In that case it would be crazy to sell up and pay CGT.

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                    #10
                    Yes and yes.

                    It would be wrong to penalise you for borrowing against a business asset now rather than when you first bought it.
                    The only difference is the timing.
                    When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                    Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                    Comment


                      #11
                      Not sure why that would be a penalty. All I would be doing is borrowing the equity and the only other way to do that would be to sell the property and pay 28% CGT.
                      It would deprive the tax man of either CGT or inheritance tax exactly as #Mrs Mug says.
                      I think I'll check with HMRC first.....

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                        #12
                        Originally posted by Section20z View Post
                        I think I'll check with HMRC first.....
                        Never take tax advice from HMRC, check with an accountant.
                        When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                        Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                        Comment


                          #13
                          Originally posted by jpkeates View Post
                          The BTL is inside the OPs rental business, any interest on a mortgage on that property is linked with the business, it doesn't matter what the money released by the mortgage is used for.
                          A new Rolex bought with the equity released wouldn't change the tax position.
                          this is factually incorrect. It is far more complicated than this - https://www.gov.uk/hmrc-internal-man...anual/bim45690 - See Example 3

                          Also, highly geared portfolios are not very tax efficient due to the changes the way tax relief is given on mortgage interest.

                          Comment


                            #14
                            Originally posted by Sibbers123 View Post
                            this is factually incorrect. It is far more complicated than this - https://www.gov.uk/hmrc-internal-man...anual/bim45690 - See Example 3
                            That example is relevant because the value of the asset when taken into the business is a factor.
                            So a property purchased as a BTL for £80,000 can only have a business associated funding up to that value, even if it's worth a lot more "now".
                            But because a property being let for rent is being used for business, extracting equity by a mortgage is a business transaction.

                            Check with an accountant - "factually incorrect"??????

                            Also, highly geared portfolios are not very tax efficient due to the changes the way tax relief is given on mortgage interest.
                            How could low gearing be more tax-efficient?
                            Not having an expense means your income is likely to be increased, but that's not necessarily "tax efficient".
                            When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                            Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                            Comment


                              #15
                              If you refinance to buy another BTL property, that is fine, as it is being reinvested into the business (I.e. not drawings). If you refinance to buy a Rolex or to buy a private residence, or gift to a family member, that would be considered drawings (reducing your capital account in the business). If your capital account goes negative, you need to restrict the tax relief obtained on the mortgage interest. The capital account being the value of the property or properties when first rented out, not the current market value.

                              if highly geared, you can end up paying more tax than you have in profit... meaning negative returns on your investment. If highly geared, make use of the SDLT holiday and incorporate your business in to a corporate wrapper (unless you’re well within the basic rate tax band).

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