The dissapearing property ladder

westernpromise

MFW_ASAP wrote: »

Only on this forum do we go from talking about property tax to talking about Mars bars.

It's a good, intuitive way to explain the concept of inflation and capital gain not being the same.

If it were possible to sell 100 Mars bars for £60 then but 100 back for £50, that would be a gain. Anything else is inflation.

MFW_ASAP

westernpromise wrote: »

Right - in a market in which CGT was levied on house sales, almost nobody would ever be able to afford to move.

This outcome is apparently desirable to people who can't afford to buy now, but I can't think why. It would mean the only sales would be probate sales.

It would, however, incentivise BTL nicely. Say you buy a house for £200k. Over say 20 years it appreciates to £500k. You'd then face a huge CGT bill if you wanted to sell.

So you never do. Instead, when its value hits say £350k, you take out £150k and you buy another house a different size to the one you live in, and you let it out. When you house's value hits £500k you take out another £150k and do it again.

You now have three houses that you own, all different sizes. All are exposed to CGT but it's much more efficiently distributed. You've got the exact same inflationary gain of £300k, but it's now spread across several properties, each with a separate CGT allowance which you optimise by selling them at intervals.

Meanwhile you therefore live in whichever one suits you at the time, and you let the other two out.

The enormous cost of stamp duty in the south-east is already bringing this situation about it - the bit where nobody sells unless they have to, that is.

To sell and buy a million quid house (not that lavish in London) is going to cost you about £20k on the sale and £44k in stamp duty on the buy - call it £75k in total. As a result nobody relocates if they can avoid it - the £75k involved is better spent on a new kitchen + bathroom + loft conversion.

Stamp duty doesn't incentivise BTL but CGT would.

CGT is already levied on BTL. You've just explained the role that leveraging has when building a property empire.

Physics

westernpromise wrote: »

That's the wrong comparison though. Physics' argument was that starting from borrowing £50 to buy 100 Mars bars, a rise in the price of a Mars bar from 50p to 60p constituted a profit.

I have shown, I suggest, that it's not. In his own example, he's gone from having a £50 net debt and 100 Mars bars to £50 of net debt (expressed as £10 - £60) and 100 Mars bars. So given this, what I want to know is, does he still expect to be taxed on the first part of that term, his £10, as though it were profit?

Clearly the answer to this has to be No.

I think you'd be in trouble with the tax man if you thought that. That £10 is precisely taxed. It would certainly contribute to my capital gains, and with enough, put me over the personal allowance. The tax-man isn't going to listen to my whines that it's just 'Mars Bar inflation', and he doesn't care I'm using borrowed money to finance this operation.

I'm genuinely curious: what, in the rules HMRC set out, gives you the idea this wouldn't be subject to taxation?

westernpromise

Physics wrote: »

I think you'd be in trouble with the tax man if you thought that. That £10 is precisely taxed. It would certainly contribute to my capital gains, and with enough, put me over the personal allowance. The tax-man isn't going to listen to my whines that it's just 'Mars Bar inflation', and he doesn't care I'm using borrowed money to finance this operation.

I'm genuinely curious: what gives you the idea this wouldn't be subject to taxation?

You don't pay CGT if you reinvest within a certain time. As I recall, though, we were talking about personal property and the concept that inflation was profit. I think it's now fairly clear that inflation is in fact just inflation.

Loughton_Monkey

westernpromise wrote: »

That's the wrong comparison though. Physics' argument was that starting from borrowing £50 to buy 100 Mars bars, a rise in the price of a Mars bar from 50p to 60p constituted a profit.

I have shown, I suggest, that it's not. In his own example, he's gone from having a £50 net debt and 100 Mars bars to £50 of net debt (expressed as £10 - £60) and 100 Mars bars. So given this, what I want to know is, does he still expect to be taxed on the first part of that term, his £10, as though it were profit?

Clearly the answer to this has to be No.

If we are making analogies with owner occupied houses, then profit tax doesn't enter into it.

If, on the other hand, we are trading Mars Bars, then of course we have to pay tax on any profits (less losses).

You can indeed buy 100 at £60, sell for £70, and then buy another lot with the whole proceeds. It is only at the end of the tax year that you would have to pay tax.

For mere mortals and human beings, though, it is a function of the way we value "wealth" that we put cash, investment instruments, and other investments on one side of the sheet at current valuation, and we put our debts on the other. The difference is our net wealth. We do not usually add in a value for the Mars Bars and other food in our fridge, or even the value of our furniture and televisions.....

The original point of debate here, though, was about leverage. And the point was well made that houses are a leveraged investment. On the understanding (and fact) that house values rise over time [ignoring the occasional adjustment, fall, or even 'crash']. Hence it makes sense to invest £50K cash and borrow £200K to buy a £250K home. The house eventually rises 20% to £300K. Hence net wealth in this regard has increased by 100% (£50K cash plus £50K profit) despite the asset 'only' increasing in value by 20%.

This is only one reason why houses are a 'money tree' in the long term. The other main reason is that even when we 'close' the investment (typically after 25 or 30 years) our investment continues providing a 'dividend'. This is the cost - or more precisely absence of cost - over the next 30 years of providing a roof over our heads.

I cannot see any rational argument, therefore, that buying one's own house this way - if one can afford it - doesn't make economic sense. If (like me) you start with 100% mortgage, the profit % is theoretically infinite. All one has to do is drip-feed repayment of the original (and subsequent) loans into the equation over 40 years or so and voila you have a house worth 5 times what you ever put into it.

westernpromise

MFW_ASAP wrote: »

CGT is already levied on BTL. You've just explained the role that leveraging has when building a property empire.

No, because we were talking about owner occupied houses. In the example I gave, I explained why it would make sense, in a world where the inflation on owner-occupied homes was taxed, for home owners to extract the inflation as extra borrowing and use it to buy BTLs. The inflation is going to be taxed anyway, as though it were profit. So you might as well split it up in a tax efficient way and at least the inflation generates income.

I'm aware of the usefulness of gearing in a BTL context but what surprises me is that there are people who think there isn't enough of this going on already.

In a world where there's CGT on the main people will either never sell it or they will acquire BTLs to dilute the impact. Neither is conducive to making property ownership easier.

Physics

westernpromise wrote: »

You don't pay CGT if you reinvest within a certain time.

But I'm clearly not reinvesting that £10. I'm keeping it.

I think it's now fairly clear that inflation is in fact just inflation.

I think the tax-man doesn't care what you call it!

Physics

westernpromise wrote: »

The inflation is going to be taxed anyway, as though it were profit.

Exactly what would 'profit' look like as opposed to 'inflation', when I come to sell something that has risen in value from when I bought it? And does the tax-man care?

westernpromise

Loughton_Monkey wrote: »

If (like me) you start with 100% mortgage, the profit % is theoretically infinite.

People who took out interest-only 100% mortgages have done even better. A £100k house bought 25 years ago is now worth probably £400k. The mortgage repayments have averaged about 7% of £100 a year, which is £175k over 25 years. The rent would have been about 7% of the average value throughout, which would have been £250k ((100+400)/2), hence total rents of £438k over the same period.

The owner can now pay off the mortgage using the £200k savings on owning versus renting, and is now housed for nothing. The tenant is still looking at paying £12,000 a year to rent, forever.

The interesting thing is that this advantage doesn't change even if the house's value falls to nil.

MFW_ASAP

westernpromise wrote: »

No, because we were talking about owner occupied houses. In the example I gave, I explained why it would make sense, in a world where the inflation on owner-occupied homes was taxed, for home owners to extract the inflation as extra borrowing and use it to buy BTLs. The inflation is going to be taxed anyway, as though it were profit. So you might as well split it up in a tax efficient way and at least the inflation generates income.

I'm aware of the usefulness of gearing in a BTL context but what surprises me is that there are people who think there isn't enough of this going on already.

In a world where there's CGT on the main people will either never sell it or they will acquire BTLs to dilute the impact. Neither is conducive to making property ownership easier.

You seem to confuse discussions by introducing similies such as BTL and Mars bars when you could just talk about homes.

Your logic seems to state that just because CGT is liable, no one will sell houses. This is obviously not the case with BTL or other commercial properties, as people often sell their properties, cashing in on the gains regardless of the fact they are taxed on some part of it.

Besides, not everyone will be able to afford to keep every house they have ever bought, many would not want to - not everyone wants to be a landlord.