Have I Been Missing A Trick Here?

Ian_W
Ian_W Posts: 3,778
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We have £100k [net of CGT] from the sale of an overseas property.

We are now considering purchasing a cottage with a view to using it in the short - medium term as a Furnished Holiday Let [FHL], but longer term as a retirement property. We haven't found a property yet and won't be looking until October [less buyers, keener prices - we hope :D ].

The cottage ideally would be around £150k and we owe 60k on our main mortgage. My original intention was to pay £90k cash then borrow a further £60k either by remort and mort on FHL. Equity & earnings would not be a problem.

There is a thread running on the mortgages forum about paying off mortgages, which is surprisingly easy and doesn't involve great expense or use of lawyers. It suddenly made me wonder "Have I Been Missing A Trick Here?" in the way I'm thinking of financing this.

My thinking now is to pay off the £60k mortgage we owe. When we find a property borrow £120k either by a new mort on our residence or against the FHL with the balance of £30k in cash. The advantage would be that all interest on £120k borrowed [rather than £60k] would be a business expense which could be set against letting income from the FHL. There would be no additional borrowing, it would just be more tax efficient. In addition, I understand that with UK FHL's [unlike our property abroad & UK BTL's] any losses can be used to reduce other tax liabilities.

So ignoring the issues of buying property, mortgage affordability, CGT etc, etc, just from a tax point of view is the second purchase option a better one, as I now think? Or am I missing something else? Will the "dogs of war" from HMC&R [if that's what it is now] bear down on me quick sticks for finding a more tax efficient way to buy this FHL? Is it evasion or avoidance?

Comments

  • In essence I think you are right. The best way to do it (if possible) is to pay off your mortgage first, and then get a mortgage on the second property for 120k. What you don't want it to look like is that you're borrowing 120k to pay 60k off your mortgage and 60k of your FHL. If you did it this way I don't think HMRC would have aleg to stand on.

    You are correct in that FHL losses can be utilised much in the same way as trade losses (against current year income, prior year income or carried forward)

    Good luck with finding a nice place!!
  • WHA
    WHA Posts: 1,359 Forumite
    Even better, you get business asset taper relief to reduce your capital gains tax when you finally sell your furnished holiday lettings. Other types of letting would only qualify for the far inferior taper relief.
  • WHA wrote:
    Even better, you get business asset taper relief to reduce your capital gains tax when you finally sell your furnished holiday lettings. Other types of letting would only qualify for the far inferior taper relief.

    Quite right - forgot about that!
  • Ian_W
    Ian_W Posts: 3,778
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    Thanks reddevilled & WHA. The money is sitting in an online saver [was very temped to keep it in a sock under the bed and count it every night, greed & 5% interest won out though!] so there will be clear evidence of both money into and money out of the account to discharge mortgage.

    It will probably be at least a month/couple of months after this that we raise the finance to buy FHL business, provided we can find a nice place.

    I obviously had been missing a trick but did work it out myself - thanks to these forums.

    Even better "business asset taper relief" - don't have a flicking clue what it is - but it sure sounds sexy to me!!

    Don't get me wrong - don't mind paying tax - but don't mind not paying it even more!! Cheers again. :T
  • OP, this is exactly our plan but our lender said it is easier for us to get a mortgage on another property if we already have one. Once it is paid off (8 months for us) and OH is over 60 (10 months) then getting a mortgage, even for me, and I'm lots yonger is more tricky.
    I need to think again.
    Good Luck!
    Love living in a village in the country side
  • Ian_W
    Ian_W Posts: 3,778
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    in my wellies wrote: this is exactly our plan but our lender said it is easier for us to get a mortgage on another property if we already have one ......
    OH is over 60 (10 months) then getting a mortgage, even for me, and I'm lots yonger is more tricky.
    Neither of us are quite as old as your OH but I do wonder about the advice from your lender in 2 respects.

    1. The advice I've received independent of our lender suggests remortgaging an unencumbered property shouldn't be that much different from a normal remort, subject to incomes & equity etc being suficient.
    2. Our current lender [at least until they bank the cheque paying off our mort, tomorrow] will allow mortgages for those much older than 60 - so long as the term has expired by age 85. It's the Coventry BS, on THIS PAGE under "general lending policy". It may well be that other lenders have similar policies re age, don't know because I haven't checked.

    So only point I'm making is you would be, IMO, well advised to seek info from other sources than just your current lender, if you haven't already done so. Different lenders have different policies and your current lender does have a vested interest in keeping you "on-board" and can only advise on their own. That aside lets hope both your plan and ours work out - don't ya just luv it when a plan comes together!! :beer:
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