Saturday, October 22, 2005

Smart way to gain tax relief on property investment top-up loans

Scotsman.com Business
RONNIE LUDWIG

"THANKS to a little-known change in the tax laws, property investors can obtain income tax relief of up to 40 per cent on top-up mortgages.

Under rules introduced in 1998 - but seldom taken advantage of - the method of calculating profits from property letting for tax purposes is done on the same basis as the profits of a trade. It is a subtle change. But, it is a long-established principle that, where the value of balance sheet assets in a business has been replaced by bank borrowing, the interest on the borrowing will qualify for relief.

Applying this to buy-to-let property opens the door for thousands of investors to obtain income tax relief on top-up mortgages - even if the funds borrowed are not used in their property letting business: they could be used to pay off your mortgage on your principal home, for school fees or even a new car purchase.

Take the example of an investment property which originally cost £100,000, upon which a £40,000 mortgage is secured. If you want to double the mortgage to £80,000 - but will spend the additional £40,000 in a way that has nothing to do with the property - you can obtain full tax relief against your rental income for the whole amount of the interest paid on the increased mortgage.

If you put the extra money borrowed into your pension fund, top-rate income tax relief is due on both the interest paid and sum borrowed once invested into your pension. But, to obtain tax relief for the full amount of interest paid, the total borrowings must not be more than the cost of the property.

There is, however, a way around this. Consider the case of someone who bought an investment property several years ago for £100,000, with a mortgage of £40,000, but the property value has surged to £200,000. They want to increase the mortgage by £100,000 to £140,000, use the extra cash to invest in their pension, clear other debt and go on a world cruise.

This is possible if the investor transfers the property to their spouse's name, thereby starting a new property investment business. From that point, total borrowing is not restricted to the original purchase price and can be based on the full current market value.

There would be no capital gains tax on the transaction, because it is an inter-spouse gift. Nor would there be any inheritance tax payable, again due to the inter-spouse exemption."

• Ronnie Ludwig is a partner at chartered accountant Saffery Champness in Edinburgh

Now this is a move I was not aware of... but it reinforces my belief that you should take specialist advice when it comes to tax matters. The local accountant who does your income tax returns will just not be aware of the many opportunities for reducing tax that exist.

Chris Bell

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House prices are 'slowly dropping'

icCoventry Oct 20 2005
By Stephen Hallmark

House sales in Coventry and Warwickshire increased for the third consecutive month in September - but prices continue to fall. The housing market survey published this week by the Royal Institution of Chartered Surveyors (RICS) has shown that prices are slowly dropping.

Chartered surveyors in the region remain cautious about the outlook for prices over the next three months. Just over half - some 52 per cent - of chartered surveyors in the area reported a fall in prices while 41 per cent said they had remained static. Only six per cent reported an increase.

Richard Franklin, a West Midlands spokesman for RICS, said: 'As we enter autumn, we are seeing the beginning of realistic house prices across Warwickshire and the West Midlands.
'The days of rocketing prices have disappeared for the time being and sellers need to pitch the price at the right level in order to sell their property.

'While sales activity has increased, it has not picked up during September as much as we have witnessed in previous years, especially in the new-build market which normally experiences its biggest sales at this time.'

Mr Franklin said the region had seen a gradual rise in demand, which had been helped by August's interest rate cut. He added: 'But buyers continue to maintain their upper hand in the market as levels of unsold property remain high, giving them more room to negotiate on prices.' "

Amidst the articles talking up the market this strikes a more realistic note.

Chris Bell

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Friday, October 21, 2005

Indian summer for property market

"The UK property market is enjoying something of an Indian summer, with positive signs building as the months go by.

House prices and mortgage searches reached new highs on Moneyextra's mortgage comparison tool in September, while the National Association of Estate Agents (NAEA) reports a return of first-time buyers to the market.

The NAEA's September figures also show an increase in the number of sales agreed, complimenting the latest Bank of England data showing 107,000 mortgages were approved in August - the highest figure since June 2004.

Today it was also revealed that last month £28.1 billion was leant in mortgages, according to the Council of Mortgage Lenders (CML), 4.3 per cent higher than in August and 11 per cent more than in the same month last year.

But while buyers return and mortgage lending increases, analysts remain sceptical that property values are set to climb consistently again.

Rather, this late increase in market activity is generally attributed to the Bank of England's decision to cut interest rates in August and sellers becoming more realistic about how much their properties are worth.

The NAEA's figures show a fall in the average difference between asking prices and sales prices for the first time since July.

But with wages growing faster than house prices, and the public's confidence returning, the market looks set to be steady for some time to come.

'Compared with the same time last year, the prospects are looking healthy. We expect the market to be lively come January,' said the NAEA's Christopher Hall. "

The news about the property market is very mixed at the moment... which is just what you would expect after the strong market of the last few years. We are in a period of consolidation which could last for many months before the market makes a decisive move either up or down - keep up with the economic and property market news to get an idea which way the move will be. Take predictions on house price movement with a pinch of salt and look for evidence.

Chris Bell

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Monday, October 17, 2005

The myth that SIPPs will give a big boost to property prices

17th Oct 2005, a Monday

The introduction of SIPPs in April will have a limited impact on either savings or house prices, a new report finds. Lee Grandin, MD of Landlord Mortgages, the UK's largest buy-to-let broker, explained: 'The advantages of investing in residential property through a SIPP will only be of interest to a relatively small proportion of the population - it is simply too costly for most consumers. Therefore I don't believe that they will have the monumental effect on the residential property market that some people are predicting.'

'You would need a pension fund of at least £80,000 and to borrow an additional £40,000 to purchase the average UK buy-to-let property. From anecdotal evidence, I really don't think that most UK consumers have this sort of money either in their pension pot or their back pocket.

'And even if they could access to this sort of capital, they can only contribute 100% of their salary or up to £215,000 (whichever is the lesser amount) into their SIPP each year. So unless they already have an existing pension fund of sufficient size, they are going to need to save for several years before you can think about investing in residential property.

'From the perspective of an existing landlord or even a holiday home owner, Sipps are also not that exciting. In order to include a property you already own into a SIPP, you would need to sell it to the schemes trustees and potentially incur a huge capital gains tax bills.'

He concluded: 'Anything, that encourages people to save for their retirement should be applauded but I really don't think that the new regulations for SIPPs will have a revolutionary effect on the residential property market or solve the pensions crisis."

There has been a lot written about the big boost to property prices that SIPP's will produce when they are introduced. I tend to agree with the view that the effect will be very limited so those looking forward to a big increase in the value of their investment property will be disappointed.

Chris Bell

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