Buy-To-Let??


C

Can2002

We're in the process of buying a new house (and selling our existing house)
but are getting worrying feedback regarding our buyer and it looks as though
the sale will fall through.

We really want to buy this property (we need to exchange by the 28th
November) and have been considering bridging loans or buy-to-let. Adding
the cost of our current house (an estimate based on the offer we received)
and the house we want to buy, we'll need to borrow around 70% of this.

We've spoken with a letting agent nearby who has given us an indication of
current market rates together with their management fees (15%+VAT for a
fully managed service).

Any feedback or observations regarding our options would be appreciated.

Cheers,
Chris
 
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R

Ronald Raygun

Can2002 said:
We're in the process of buying a new house (and selling our existing
house) but are getting worrying feedback regarding our buyer and it looks
as though the sale will fall through.

We really want to buy this property (we need to exchange by the 28th
November) and have been considering bridging loans or buy-to-let. Adding
the cost of our current house (an estimate based on the offer we received)
and the house we want to buy, we'll need to borrow around 70% of this.

We've spoken with a letting agent nearby who has given us an indication of
current market rates together with their management fees (15%+VAT for a
fully managed service).

Any feedback or observations regarding our options would be appreciated.
Open bridging loans ("open" means you have no binding completion date)
tend to be difficult to get and expensive, and getting a Buy-to-Let
loan (strictly in this case a Let-to-Buy) is a convenient alternative
even if your intention remains to sell in preference to letting.

You say your total borrowing would be 70% of the combined value of the
houses, but they're not usually lumped together, especially if one will
use a BTL loan and the other a "normal" one. You should easily be able
to get a loan of up to 80% of the value of the property you say you will
let, provided the anticipated rental income (confirmed as realistic by a
letting agent) is more than 130% or so of the loan payments.

If you're comfortably within those limits, you may like to borrow a
little less on the letting house and instead a little more on your
new living-in house because it can be cheaper that way (because the
letting loan will typically be charged at a slightly higher interest
rate, unless your existing borrower is prepared to give permission to
let without increasing the rate). This assumes you continue trying to
sell. If you do get a tenant, you get tax relief on the loan interest,
and this may make the letting loan cheaper than the living loan. But
this won't work if you increase the loan on your existing house above
its existing level. Only loans used to buy the property qualify for
relief, equity withdrawal does not.
 
D

Daytona

We've spoken with a letting agent nearby who has given us an indication of
current market rates together with their management fees (15%+VAT for a
fully managed service).
15% is about the max for full management. If you didn't have to get the agent to
verify the rent for your mortgage - I'd suggest negotiating. It might be worth
seeing if others are better value, but make sure they know what they're doing
and check with the Registry Trust to see if they've got any CCJs.
Any feedback or observations regarding our options would be appreciated.
Some use full links here -
<URL:http://groups.google.co.uk/[email protected]&rnum=1>

hth

Daytona
 
T

Tim

this won't work if you increase the loan on your existing house above
its existing level. Only loans used to buy the property qualify for
relief, equity withdrawal does not.
See Example 2 at
http://www.inlandrevenue.gov.uk/manuals/bimmanual/BIM45700.htm.

When a previous PPR is introduced into a property business, and re-mortgaged
at anything upto the latest market value (at the time introduced to
business), *all* of the mortgage interest is allowed against tax....

----------------------------------------------

Example 2

Mr A owns a flat in central London, which he bought ten years ago for
£125,000. He has a mortgage of £80,000 on the property. He has been offered
a job in Holland and is moving there to live and work. He intends to come
back to the UK at some time. He decides to keep his flat and rent it out
while he is away. His London flat now has a market value of £375,000.

The opening balance sheet of his rental business showsMortgage £80,000
Property at MV £375,000
Capital account £295,000

He renegotiates his mortgage on the flat to convert it to a buy to let
mortgage and borrows a further £125,000. He withdraws the £125,000 which he
then uses to buy a flat in Rotterdam.

The balance sheet at the end of Year 1 shows

Mortgage £205,000 Property at MV £375,000
Capital account B/F £295,000
Less Drawings £125,000
C/F £170,000

Although he has withdrawn capital from the business the interest on the
mortgage loan is allowable in full because it is funding the transfer of the
property to the business at its open market value at the time the business
started. The capital account is not overdrawn.
 
W

wayne llewelyn

"(15%+VAT for a fully managed service)" sounds a bit pricey. 10%-12% is the
`norm`.
 
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T

Tim

Tim said:
See Example 2 at
http://www.inlandrevenue.gov.uk/manuals/bimmanual/BIM45700.htm.

When a previous PPR is introduced into a property business, and re-mortgaged
at anything upto the latest market value (at the time introduced to
business), *all* of the mortgage interest is allowed against tax....

----------------------------------------------

Example 2

Mr A owns a flat in central London, which he bought ten years ago for
£125,000. He has a mortgage of £80,000 on the property. He has been offered
a job in Holland and is moving there to live and work. He intends to come
back to the UK at some time. He decides to keep his flat and rent it out
while he is away. His London flat now has a market value of £375,000.

The opening balance sheet of his rental business showsMortgage £80,000
Property at MV £375,000
Capital account £295,000

He renegotiates his mortgage on the flat to convert it to a buy to let
mortgage and borrows a further £125,000. He withdraws the £125,000 which he
then uses to buy a flat in Rotterdam.

The balance sheet at the end of Year 1 shows

Mortgage £205,000 Property at MV £375,000
Capital account B/F £295,000
Less Drawings £125,000
C/F £170,000

Although he has withdrawn capital from the business the interest on the
mortgage loan is allowable in full because it is funding the transfer of the
property to the business at its open market value at the time the business
started. The capital account is not overdrawn.
Is this only where the property is assigned to a Ltd company?

My understanding was that if you lived in a property worth say £100k and
with a mortgage of say £30k, if this loan was increased to say £70k to help
purchase a new house to let out the old, the extra £40k would not attract
tax relief.

The overriding consideration would be the purpose of the loan rather than
what it is secured against. How is this different?
 
T

Tim

Tim said:
Is this only where the property is assigned to a Ltd company?
Why do you ask that? - The example quoted doesn't mention a Ltd Co at all.

Tim said:
My understanding was that if you lived in a property worth say £100k and
with a mortgage of say £30k, if this loan was increased to say £70k to help
purchase a new house to let out the old, the extra £40k would not attract
tax relief.
True for a house *already* within the "property business", but not for a PPR
being *introduced* into the property business. Read the example on the IR
website.
[It may have also been relevant (in the past) to introduction of a PPR into
business, but is now as shown in the IR example - which seems to have
appeared fairly recently...]

Tim said:
The overriding consideration would be the purpose of the loan rather than
what it is secured against. How is this different?
It is different because you are doing it at the time that you introduce the
property into the business - an IR concession, if you will.
[Consider it like selling the house from "you" to the "business"??]
 
T

Tim

Tim said:
Tim said:
Is this only where the property is assigned to a Ltd company?
Why do you ask that? - The example quoted doesn't mention a Ltd Co at all.

Tim said:
My understanding was that if you lived in a property worth say £100k and
with a mortgage of say £30k, if this loan was increased to say £70k to help
purchase a new house to let out the old, the extra £40k would not attract
tax relief.
True for a house *already* within the "property business", but not for a PPR
being *introduced* into the property business. Read the example on the IR
website.
[It may have also been relevant (in the past) to introduction of a PPR into
business, but is now as shown in the IR example - which seems to have
appeared fairly recently...]

Tim said:
The overriding consideration would be the purpose of the loan rather than
what it is secured against. How is this different?
It is different because you are doing it at the time that you introduce the
property into the business - an IR concession, if you will.
[Consider it like selling the house from "you" to the "business"??]
But that's my point. I though your business and you were effectively one
and the same. As you say the example is clear but seems such a turnaround
of conventional thinking. I find the concession not in character for the
IR!
 
T

Tim

How extraordinary. This appears to contradict IR150 paras 185-187.
Fortunately, IR150 is not law - simply an everyday explanation of the rules
for "man in the street". Look at the disclaimer on the last page: "for
guidance only", "not binding in law".

You can bet your bottom dollar that if IR150 contradicted law/regulations
*in the taxpayer's favour*, the IR would surely rely on the disclaimer to
say that IR150 does not apply! [ - so why not the other way around?]
 
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R

Ronald Raygun

Tim said:
Fortunately, IR150 is not law - simply an everyday explanation of the
rules
for "man in the street". Look at the disclaimer on the last page: "for
guidance only", "not binding in law".
Well, the manuals aren't law either, they're simply guidance issued
internally to tax inspectors. Written by people who are just as
fallible as those who write the guidance leaflets for punters.

Clearly one of them must be wrong, and in this case I can't help
but think there is at least a possibility that the manual is wrong.
It seems to suggest a break with the usual doctrine that a person
cannot have a separate persona from himself when acting in a
business capacity (as he would have if acting through a Ltd Co).

The increased borrowing would clearly be for business purposes if
he had had to buy the proverty at MV when introducing it into the
business, but that is not the case. He can't buy it from himself
and therefore it doesn't make sense to take out a loan to facilitate
a purchase which hasn't taken place.

It would have been open to him to sell the property to an accomplice,
and then buy it back using a new bigger loan prior to introducing
it to the business, but that hasn't actually happened. I can see
why they might be amenable to treat such a situation as though that
had happened, but it seems uncharacteristically charitable of them.
You can bet your bottom dollar that if IR150 contradicted law/regulations
*in the taxpayer's favour*, the IR would surely rely on the disclaimer to
say that IR150 does not apply! [ - so why not the other way around?]
Fair enough, but I wonder whether any of our regular readers might be
aware of any specific case rulings which could have brought about
the interpretation expressed in BIM45700 example 2. Or is it an ESC?
 

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