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Existing property as guarantor
Comments
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Do you agree that once there is a mortgage on the let property that mortgage can be replaced by one on the new residential property? That is, that BIM45685 applies to replacing a mortgage secured on the let property with a lower interest rate one secured on the residential property?
Ok, so you now accept that the mge on the residential property must be clearly financially linked to the business, to be permitted as an expense of the let property.
That being said, and when considering your proposals, yes it is clearly possible (as already discussed), but this format in the timeframe could be a potentially costly way of going about it.
IF what I think what you are trying to say is the following ....
1. Release equity from Property A (the business), to fund (wholly or partly) the purchase for Property B (residential property).
2. Property B now being purchased ( and lets assume unencumbered), the individual then subsequently remortgages Property B, to redeem the mortgage on Property A.
3. The redemption of the BTL mortgage on property A (either wholly or partly) - from funds generated from Property B - is classed as capital injection - and thereby the mortgage interest associated with the injection and Property B, at that point duly becomes a permitted business related expense.
BUT .. there are some considerations to this ...
Assuming OPs meet criteria, and the rental income to mge ration is suitable.
1. The OP would need to wait a minimum of 6 months from purchase of Property B, before any remortgage application may be submitted (of course its sucess dependant upon status at that time).
2., The OPs income would then need to be sufficient under the remortgage application, to fund the repayment of the OS BTL mortgage on Property A. (inclusion of rental income may not be possible, as the let property will still be mortgaged at the time of application).
3. Fly in the ointment, is that we already know the OP has concerns about their income supporting their desired mortgage amount as it stands. Whereby their original question was if rental income could be included with earned income for the lenders affordability assessment (of which Wh05. advised Abbey/Santander and I advised NWide on an UNENCUMBERED let property).
So there may well be real affordability issues in relation to effecting a mge on Prop B, sufficient enough to wholly redeem the BTL mge on Prop A - with any advance restircted accordingly. Although of course it should be noted, that should they choose to just redeem what they can afford, any residual BTL mge remaining on Property A would still remain fully tax deductable, as would the new (capital injection element of the) mge on Property B. Even so, although they would have 2 mges instead of 1, it would still be a positive in relation to tax mitigation - which is the aim of the game !
4 The OP would incur BTL redemption and exit penalties (if wholly redeeming), or just redemption pens if partially redeemed (which may be avoided if an ERP free product is sourced at outset).
5 Assuming Property B is unencumbered at purchase, OP would also need to remortgage this directly upon the 6 mth anniversary of ownerhship, to stand any chance of qualifying for any fee free remortgage legals package. (this is due to registration and search issues, of which the lender will generally treat the legals surrounding an unencumbered property as a purchase, and therefore not free)
So there may be 2 sets of conveyencing costs incurred in the conclusion of this exercise, if the OP does replace Property A BTL mge with res mge funding on Property B.
Of course the WHOLE viability of this, and any benefit (due to the potential costs) would be very much dependant on sourcing a residential rate that is sufficiently lower in both fees and overall costings to recoup the incurred fees as discussed (the acceptable differential being largely depandant upon how quickly they wish to recoup incurred costings.
Such as those in relation to Property B - of further conveyencing fees (if non qualifying for a fee free package), plus further application, reservation/arrangement and *broker fees (*if used to source resi mge). And in respect to Property A - further conveyencing and *redemption penalties (*if no redemption free product is sourced) plus mortgage exit fees ....
So although its not straight cut, and there may be potential hiccups & costs that the OP may not be able to absorb/wish to incur - it certainly isn't an unreasonable consideration to achieve optimum tax mitigation. Only achieved on a private residential property mge, and as said from my initial post, by effectively demonstrating a financial link between this and its funding of the business itself - of which the above would satisfy HMRC requirements (if the OP ensures there is a record retained of the clear audit trail between the 2 transactions/events).
Hope this helps
Holly0 -
Oneday77, one thing that discourages me a bit is if you do it, you get to file a tax return every year. If you're not already doing that you may decide it's just not worth the hassle of entering the self-assessment system for the potential gain from just one property.
I've never thought anything else during this discussion. We've largely different in how we write the requirements and what should or shouldn't qualify (which can a different thing from what HMRC thinks does qualify). On this matter I've just decided not to discuss it any more with you because the discussion wasn't going anywhere useful for Oneday77. Maybe a nice discussion in general for us sometime about whether the way HMRC writes the rules reflects the business reality (money borrowed to limit how much money is transferred into the business), but HMRC has to have rules it can follow, so we get to deal with those.holly_hobby wrote: »Ok, so you now accept that the mge on the residential property must be clearly financially linked to the business, to be permitted as an expense of the let property.
Yes, in general that's the approach I described. Not the only way, just an example that may be OK for some people sometimes, depending on the views of their accountant.holly_hobby wrote: »That being said, and when considering your proposals, yes it is clearly possible (as already discussed), but this format in the timeframe could be a potentially costly way of going about it. ... IF what I think what you are trying to say is the following ....
1. Release equity from Property A (the business), to fund (wholly or partly) the purchase for Property B (residential property).
2. Property B now being purchased ( and lets assume unencumbered), the individual then subsequently remortgages Property B, to redeem the mortgage on Property A.
3. The redemption of the BTL mortgage on property A (either wholly or partly) - from funds generated from Property B - is classed as capital injection - and thereby the mortgage interest associated with the injection and Property B, at that point duly becomes a permitted business related expense.
Though I wouldn't really call it a capital injection at stage 3 because the capital injection was what happened when part of the property was transferred into the BTL business, the other part not a capital injection being whatever the original (say BTL) mortgage borrowing was. So all we're discussing in 2 and 3 is switching the borrowing security and mortgage product, not an end result change in the capital position of the business - that is, no final change in its capital account balance once all is done.
I use "say BTL" because until the transfer to the business a residential mortgage can be used, so there's potentially an opportunity to never have a BTL mortgage at all - depending on the comfort of the accountant with the timings and whether the owner is living in say let property or on holiday for a while at the time of the completion of the deals. Or in some cases it might make sense to have it in the business but unlet and that might be OK to some residential lenders, or at least an insignificant breach of terms. Maybe if some construction work is being done for conversion, say. Or I suppose some residential lenders might offer short term permission to let and some borrowers might seek that, say if they were relocating to a different area. Really something to discuss with the mortgage broker and sort out what's the best package.
Maybe, depends on the deals. Some lenders wouldn't require this, some would. If the property is mortgaged before the business is started, say on a residential offset mortgage, fees-free, this may be inexpensive to do even if a lender with a six month requirement is involved. Really something for the mortgage brokers and perhaps accountant involved to advise on to put together the best package to get the job done. Need to watch the mortgage conditions and such to be sure you stay within their various requirements.holly_hobby wrote: »1. The OP would need to wait a minimum of 6 months from purchase of Property B, before any remortgage application may be submitted (of course its sucess dependant upon status at that time).
Hmm, not so sure this is a limitation. Provided there is a reasonable estimate of rental potential from a letting agent or the market data I expect most lenders to accept that provided it meets their criteria for rental cover and the general income of the borrower is OK on criteria also. Self-funded BTL classification presumably. Though I suppose there are lenders who don't like self-funded BTL as a concept. I suppose something for the mortgage broker to watch out for to be sure that suitable products are involved.holly_hobby wrote: »2., The OPs income would then need to be sufficient under the remortgage application, to fund the repayment of the OS BTL mortgage on Property A. (inclusion of rental income may not be possible, as the let property will still be mortgaged at the time of application).
Maybe. I tend to focus more on saying what can be done and who to ask for guidance. Letting them know the tax relief part is doable, with suitable care, may help them to sort out the finances and know what they need to look to to get the deal done.holly_hobby wrote: »3. Fly in the ointment, is that we already know the OP has concerns about their income supporting their desired mortgage amount as it stands. Whereby their original question was if rental income could be included with earned income for the lenders affordability assessment (of which Wh05. advised Abbey/Santander and I advised NWide on an UNENCUMBERED let property).
Indeed, seems we are in general agreeing on the underlying principle, and the need to take care to do it properly, with appropriate advice.holly_hobby wrote: »Even so, although they would have 2 mges instead of 1, it would still be a positive in relation to tax mitigation - which is the aim of the game !
Yes, potentially. I'd really want the broker and accountant involved to pay close attention to timing to see whether a residential deal is doable to save cost. But if not, the costs are probably worth paying for the ongoing relief. At least there are now a few non-fixed BTL deals available so there's not necessarily a need for a fixed rate exit penalty, though "fees-free" and "BTL" seem to be entirely incompatible expectations in the current market... so some money would the to be spent if a BTL product is required to get it done.holly_hobby wrote: »4 The OP would incur BTL redemption and exit penalties (if wholly redeeming), or just redemption pens if partially redeemed (which may be avoided if an ERP free product is sourced at outset).
I suppose a bridging product might conceivably work out cheaper, depending on the specifics and accountant advice. Takes bit of thought but that's what brokers are for...
Yes, agreed that the costs and details need to be watched, as always in BTL as a business, not a hobby.holly_hobby wrote: »So although its not straight cut, and there may be potential hiccups & costs that the OP may not be able to absorb/wish to incur - it certainly isn't an unreasonable consideration to achieve optimum tax mitigation.
I suppose for Oneday77 the message is that we agree that there are ways to get it done, go discuss with the professionals to sort out the best package and/or whether it makes sense for this particular deal.0 -
Though I wouldn't really call it a capital injection at stage 3 because the capital injection was what happened when part of the property was transferred into the BTL business
No, you don't understand, raising the mge on Prop B to repay the os mge on Prop A, will be/has to classed as capital injection (via loan) resulting in a expense to the business - as its THAT aspect that qualifies it as being a tax deductable expense of the business.
I use "say BTL" because until the transfer to the business a residential mortgage can be used, so there's potentially an opportunity to never have a BTL mortgage at all - depending on the comfort of the accountant
Property A - which the OP has declared is to be let - accordingly may not secure a residential mge, as it is a semi-commerical unit, and as such the OP must secure a BTL (aka semi-commerical mortgage), to avoid breach of contract of any resi mge . (notwithstanding CTL issues - which again won't apply in this case).
A residential mge could only be secured on Prop A - if it is not and there is no intention, at the time of application, for it to be let, which we know NOT to be the case - as the OP needs the rental income to afford their mge on Prop B. Indeed to say or infer otherwise as suggested (i.e being converted, holiday home, simply unoccupied, or whatever is conjured up), would be knowingly inaccurate (sounds fluffier than fraudulent) by the OP (and the adviser if the OP divulges the real status of Prop A). But I can only speak for myself that as a professional adviser, not something I would ever get myself involved in, or advise others to do for obvious reasons.
But I am talking in realms of keeping the OP out of breach issue and how an adviser should behave.Maybe, depends on the deals. Some lenders wouldn't require this, some would.
All lenders requirem a minimum of 6 mths between purchase, or remortgage of a property before a further remortgage deal is sought, either with themselves (ie FA) or an alternative provider. This is standard industry criteria.Hmm, not so sure this is a limitation . Provided there is a reasonable estimate of rental potential from a letting agent or the market data I expect most lenders to accept that provided it meets their criteria for rental cover and the general income of the borrower is OK on criteria also. Self-funded BTL classification presumably. Though I suppose there are lenders who don't like self-funded BTL as a concept. I suppose something for the mortgage broker to watch out for to be sure that suitable products are involved.
Mge on Prop B - OPs residential property, will be based and limited to OPs earned income with most lenders. The inclusino of rental income is considered by Santander & NWide if the BTL is self funding and also (in the case of NWide) UNENCUMBERED i.e without mge.At least there are now a few non-fixed BTL deals available so there's not necessarily a need for a fixed rate exit penalty, though "fees-free" and "BTL" seem to be entirely incompatible expectations in the current market...
Prop A would generally not qualify for a fee free BTL remortgage deal in respect of legals, as it is unencumbered.
Although I am a qualified industry professional, I currently don't actively advise the public, but instead currently concentrate on industry audit and compliance work, so I am unfortuantely unfamiliar with all current BTL deals and products, and as I don't have access to Mortgage Brain or other sourcing software the OP would need to speak to an active adviser to source appropriate products & support them through the application process - of which they will happily assist.
But the basis of how to manipulate their mortgage on Property B to become a permitted business expense of Property A (the Business) has now been discussed at great length - and I do feel may have become a little over complicated to hold further interest of general readers.
We agree that we have diff understandings and views on different areas in relation to tax, mges, etc in respect of this matter - generally as we are coming from different view points on this - which is fine & good for debate purposes.
Indeed, lets hope all discussion on this thread has aided the OP - and the matter now being exhausted
lets move to other things, until of course Mr & Mrs Oneday shout out for more help !
H0 -
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Ah, OK, so you were thinking of that aspect rather than capital account transactions. Fair enough.holly_hobby wrote: »No, you don't understand, raising the mge on Prop B to repay the os mge on Prop A, will be/has to classed as capital injection (via loan) resulting in a expense to the business
Not quite so. If there was no intention at the time of application to have the property be let while the loan was in place it should be fine with no breaches of terms. And of course that then has to be delivered in fact, with no letting while it's in place. There might, say, also be an intent to ask the lender to quote terms for a porting to the new property purchase, if that ever happens. Up to the borrower and associated professionals to ensure that all relevant terms are known and complied with.holly_hobby wrote: »A residential mge could only be secured on Prop A - if it is not and there is no intention, at the time of application, for it to be let, which we know NOT to be the case
Of course I do know that there's pretty widespread fraud in the form of residential mortgages used for let properties, and that's not something that any professional could properly endorse or assist with. Sadly I suppose you end up encountering a lot of cases of that sort.
Unsurprisingly that shows up in the flavour of your posts. Lots of focus on what must not and cannot be done, when perhaps it may be more helpful to say what can be done, how to go about it then offer some tips on common ways that people get it wrong. Up to you of course, but maybe feedback on impression may be helpful.holly_hobby wrote: »Although I am a qualified industry professional, I currently don't actively advise the public, but instead currently concentrate on industry audit and compliance work
Indeed. I'd wish you less encounters with people breaching the law and rules but that'd be wishing you no more work, so I'll instead wish you well.holly_hobby wrote: »Indeed, lets hope all discussion on this thread has aided the OP - and the matter now being exhausted lets move to other things, until of course Mr & Mrs Oneday shout out for more help ! 0 -
Indeed James, there are lots of ways round many mge issues, and in my experience (inc as a mge adviser & running mge desks) I've seen or heard of most of them. And whilst myself and others experienced in the field will know many a back door trick or 2, and how to obtain things the client may want by using them, we obv can't promote those on a forum (or otherwise TBH).
Accordingly any open comment I give on a thread (as with a majority of other advisers), will always have to be from the hymn sheet - as to do otherwise, could cast doubt over the validity of our professionlism and any advice given.
But I take on board your comments ...
Till next time ...
H0
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