Pension versus Buy To Let

Durban

Thrugelmir wrote: »

Which will be taxable at the point of realisation. Trouble with property is, improbable that you will only sell part. Which could potentially push you into a higher rate tax band.

I don't understand this bit. What do you mean could potentially push you into a higher rate tax band? If you are basic you pay 18% and if you are higher you pay 28% capital gains tax on property.

I didn't think that the gain was then also lumped with your income , be it pension or employment income.

Are you saying that for instance , if someone earns say 30,000 per year and is a basic rate tax payer , then sells their BTL and realises a profit of 80,000 , then that is lumped together with their earned income to push them into a higher rate tax bracket?

cns06

The CGT vs IHT thing is a ticking time bomb for many. My folks have this problem, they have several properties and are at the point in life where they are planning their estate.

The problem is they cant stomach the CGT, they are tax averse. So now they are looking at other options to kick the can down the line and push it into an IHT problem.

The issue is costs and stress. They are looking at spending a lot of money with solicitors, IFAs, fees for trusts etc. People trying to rip them off at every turn.

Its all getting a bit silly. If they had just accepted 5 years ago that they had a good run and cashed out then they would not be in this problem.

To be in your late 70s with failing health having to rely on outside people to advise you on matters which are confusing at the best of time is just not a nice situation to be in. The stress is not doing them any good.

Honestly I think they are going to spend more over the next 10 years than what the CGT would cost them if they just ripped the band aid off.

Malthusian

Durban wrote: »

Are you saying that for instance , if someone earns say 30,000 per year and is a basic rate tax payer , then sells their BTL and realises a profit of 80,000 , then that is lumped together with their earned income to push them into a higher rate tax bracket?

Correct.

The capital gain sits on top of income so the capital gain is the part that gets hit by higher rate tax.

Terron

Malthusian wrote: »

Correct.

The capital gain sits on top of income so the capital gain is the part that gets hit by higher rate tax.

Yikes. I am currently selling a former home. There will be no CGT to pay as the PPR relief will bring it under the CGT allowance. But the gain since 1996 will be about £170k. You are saying I will have to pay income tax on that?

nigelbb

Terron wrote: »

Yikes. I am currently selling a former home. There will be no CGT to pay as the PPR relief will bring it under the CGT allowance. But the gain since 1996 will be about £170k. You are saying I will have to pay income tax on that?

No. If there is no CGT to pay as it was your residence then there is no income tax to pay on the sum either.

I think that you might have been confused by the description of how CGT works in fact the rate at which you pay capital gains tax is more correctly described as being determined by your income rather than by your income tax rate.

CGT rate is 10% (18% for residential property) for your entire capital gains profit if your overall annual income is below £50K i.e. you are a standard rate taxpayer but 20% (28% for residential property) if your overall annual income is over £50K i.e. you are a higher rate taxpayer.

Terron

nigelbb wrote: »

No. If there is no CGT to pay as it was your residence then there is no income tax to pay on the sum either.

I think that you might have been confused by the description of how CGT works in fact the rate at which you pay capital gains tax is more correctly described as being determined by your income rather than by your income tax rate.

CGT rate is 10% (18% for residential property) for your entire capital gains profit if your overall annual income is below £50K i.e. you are a standard rate taxpayer but 20% (28% for residential property) if your overall annual income is over £50K i.e. you are a higher rate taxpayer.

There will be CGT as I let it for a few years, just less than the allowance. I was assuming a rate of 28% when I made the calculation. I am a basic rate tax payer, but my income will be going up this year, and the level at which I become a higher rate taxpayer is lower as I have BTL mortgages. Exactly where I will be for this financial year I won't know for a while. I haven't finished doing my accounts for 2018/19 yet.

Thrugelmir

Terron wrote: »

Not necessarily. If instead of selling you remortgage for a higher value you can realize the value tax free.Yes you are still liable to CGT if you sell, but like income tax on pensions it is deferred. It you never sell the CGT liability goes away on your death and only IHT applies, which is reduced by the mortgage debt. There are aeveral books explaining how to do this.


It does not work so well in the North where most of my properties are as capital gains have been rarer and rents are a higher proportion of the income.



It also does not work so well with the reduction in mortgage interest relief. Indeed some people who had taken it to extreme levels have found themselves in trouble. Their tax bills have increased, but they are unable to sell as they haven't left enough equity in the property to pay the CGT. So they are relying on capital growth to pay their taxes, and that has been less in some areas.

Simply leveraging with a higher and higher of debt in itself potentially creates a totally different set of issues.

I'm somewhat old fashioned in that I'm not in a believer in the tail wagging the dog approach to business. For the simple reason that the rules might get changed at some point. The obvious loop holes soon get boxed in if there's a decent amount of tax revenue that can be collected.

Terron

Thrugelmir wrote: »

I'm somewhat old fashioned in that I'm not in a believer in the tail wagging the dog approach to business. For the simple reason that the rules might get changed at some point.

My first thought when I read about it was how could this have been allowed for so long. I expected something to be done, and the reduction in mortgage interest relief appears to be that thing.

Durban

I thought that you could only claim the tax relief up to the original value it was when you started to rent it out.


For example , property worth £145, 000 when first rented out and mortgage for £110,000. Claim tax relief for mortgage interest of £110,000.


A few years later , property is worth £200,000 and equity released on remortgage. Tax relief can only be claimed for interest of up to original value of £145,000 nothing more.


Is this correct ?

Terron

Durban wrote: »

I thought that you could only claim the tax relief up to the original value it was when you started to rent it out.


For example , property worth £145, 000 when first rented out and mortgage for £110,000. Claim tax relief for mortgage interest of £110,000.


A few years later , property is worth £200,000 and equity released on remortgage. Tax relief can only be claimed for interest of up to original value of £145,000 nothing more.


Is this correct ?

I have been trying to reserach this. It seems it is a general business rule not specific to property that you can't claim interest relief on the amount of loan that exceeds the capital you put in, i.e. if you are "overdrawn on your capital account".
It seems correct if you have only one property. if you have several it looks like the total values are used.
However with the reduction in relief HMRC changed their advice and different places say different things so it is confusing.