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Flats as BTL investments

Covering Market, Trends, and Practical (but see LEMON-AID for Building & DIY)
Nimrod103
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Flats as BTL investments

#48775

Postby Nimrod103 » April 26th, 2017, 10:32 am

Following on from my question on leaseholds, my understanding of the recent tax changes to BTLs, is that interest charges are no longer reclaimable against rental income. In which case, I would have thought, BTL as an investment vehicle, was ''holed below the water line". The only people who can regard renting out property as an investment, are those who can buy for cash, or buy via a company. If so, one would have thought that prices for things like flats (where there is much less owner occupation demand) would be plummetting. Particularly if there is a sitting tenant. Has anyone noticed a decline in prices lately?

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Re: Flats as BTL investments

#48785

Postby Alaric » April 26th, 2017, 10:56 am

Nimrod103 wrote: The only people who can regard renting out property as an investment, are those who can buy for cash, or buy via a company.


Isn't the issue unchanged? It can be profitable when the rental and expected gain on later sale outweigh the cost of borrowing and the expenses of running the BTL. Increasing the cost of borrowing may make alternative investments more attractive, which I suppose was the point of changing the rules.

Nimrod103
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Re: Flats as BTL investments

#48788

Postby Nimrod103 » April 26th, 2017, 11:05 am

Alaric wrote:
Nimrod103 wrote: The only people who can regard renting out property as an investment, are those who can buy for cash, or buy via a company.


Isn't the issue unchanged? It can be profitable when the rental and expected gain on later sale outweigh the cost of borrowing and the expenses of running the BTL. Increasing the cost of borrowing may make alternative investments more attractive, which I suppose was the point of changing the rules.


Perhaps it depends what part of the country one is looking at. I am in the SE, about 40 miles from London. The property on which I was giving my opinion to a friend is a leasehold flat above a shop. Roomy and attractive as it is, my guess is that it would not appeal to an owner occupier, so the market will always be to a BTL investor. Yet such an investor has seen their 'financial firepower' considerably diminished as a result of these tax changes, but it doesn't seem like this is yet reflected in the price.

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Re: Flats as BTL investments

#48796

Postby JonE » April 26th, 2017, 11:18 am

Nimrod103 wrote:my understanding of the recent tax changes to BTLs, is that interest charges are no longer reclaimable against rental income.


That's a misunderstanding. Interest remains an allowable cost but relief for interest is to be restricted to 20%. Individuals who find themselves above the higher-rate threshold will be hit but non-taxpayers and those who remain basic-rate payers will not.

As some who will be hit are considering incorporation (for new acquisitions, at any rate) I'd expect some mortgage lenders to make their BTL loans to companies more attractive in one way or another so as to grab a bigger slice of that pie - which could, in turn, encourage the incorporation that currently seems unattractive because of the awkward state of the corporate-BTL loans market.

Cheers!

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Re: Flats as BTL investments

#48805

Postby Alaric » April 26th, 2017, 11:37 am

JonE wrote:That's a misunderstanding. Interest remains an allowable cost but relief for interest is to be restricted to 20%. Individuals who find themselves above the higher-rate threshold will be hit but non-taxpayers and those who remain basic-rate payers will not.


Here's an article explaining it.
http://www.moneysupermarket.com/landlor ... ax-relief/

I don't think the press did a very good job of explaining the changes, as like the OP, I had thought that all relief on loans had been disallowed unless the BTL was through a Company.

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Re: Flats as BTL investments

#49111

Postby Nimrod103 » April 27th, 2017, 10:32 am

Alaric wrote:
JonE wrote:That's a misunderstanding. Interest remains an allowable cost but relief for interest is to be restricted to 20%. Individuals who find themselves above the higher-rate threshold will be hit but non-taxpayers and those who remain basic-rate payers will not.


Here's an article explaining it.
http://www.moneysupermarket.com/landlor ... ax-relief/

I don't think the press did a very good job of explaining the changes, as like the OP, I had thought that all relief on loans had been disallowed unless the BTL was through a Company.


Yes, I believe I registered that when the change in policy was announced, but then forgot about it. Of course, it is unlikely that many basic rate taxpayers own BTLs. Also even basic rate taxpayers are now in the Chancellor's sights if they hold shares what with the limit on dividend relief being limited to a small amount.

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Re: Flats as BTL investments

#49245

Postby JonE » April 27th, 2017, 5:33 pm

Nimrod103 wrote:Of course, it is unlikely that many basic rate taxpayers own BTLs.


There could be more than you might think.

Perhaps joint owners have arranged their affairs such that (at least) one of them would not be an HR taxpayer.

Perhaps someone who has become tax-resident elsewhere will not have sufficient income assessed to UK tax to be an HR taxpayer (bearing in mind also that pension income can be exempted from UK tax in specific circumstances).

On a different aspect, I haven't tried to discover exactly how the computation is to be performed but have the vague notion that some taxpayers may cross the HR threshold at the 'gross income' level before interest is taken into account. That could mean that relief on interest is restricted for them (completely or to some extent) even though the net profits (as previously computed) wouldn't take them over the HR threshold. An edge case that may merit investigation for some but which would possibly be better discussed on the Taxes forum.

Cheers!

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Re: Flats as BTL investments

#49573

Postby Arborbridge » April 28th, 2017, 10:21 pm

Of course, it is unlikely that many basic rate taxpayers own BTLs.


I cannot see the justification for this, and certainly not the "of course". I would estimate there are very many BTLers with only one or two properties bringing in some income and who are not particularly well off. Additionally, a percentage will be pensioners and may have invested in BTL when they had a lump sum from ingeritance, but with little other income in retirement. Many will be husband and wife teams so the income would be split, increasing the chances that they are BR tax payers.

No, I reckon the number of basic tax payers is quite high, though how high is another matter - they are certainly not insignificant in number, I'd suggest.

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Re: Flats as BTL investments

#55856

Postby Charlottesquare » May 24th, 2017, 10:33 pm

JonE wrote:
Nimrod103 wrote:
On a different aspect, I haven't tried to discover exactly how the computation is to be performed but have the vague notion that some taxpayers may cross the HR threshold at the 'gross income' level before interest is taken into account. That could mean that relief on interest is restricted for them (completely or to some extent) even though the net profits (as previously computed) wouldn't take them over the HR threshold. An edge case that may merit investigation for some but which would possibly be better discussed on the Taxes forum.

Cheers!


Yes, in practice I think you compute the tax without considering interest then reduce the tax so computed by 20% of the interest (insofar as it is less than the rental figure net of other expenses) so it will push people into higher rate.


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