Tackling the ‘terrible tax change’ on buy-to-let

Tackling the ‘terrible tax change’ on buy-to-let

Henry Emson

So serious is this adjustment by the Government that former Bank of England economist, David Miles, referred to it as ‘terrible’

According to Henry Emson, Business development manager at MMC Ventures, Landlords who directly own a mortgaged buy-to-let residential property are facing a seismic change to their financial position as they cease to be able to run the arbitrage between rental income and cheap debt.

Henry had this to say: "As of April 6th 2017 interest payments will gradually cease to be an allowable deduction against rental income, turning historically profitable portfolios into cash negative assets. So serious is this adjustment by the Government that former Bank of England economist, David Miles, referred to it as ‘terrible’.
 
So, what does this mean for historic property owners who have relied on real estate to provide both wealth and income?

i) As they sell out of the residential property asset class they will see a 28% Capital Gains Tax (CGT) levied – a significant impact on their net worth.

ii) They need to find a new means of wealth generation; no easy task at a time of such low interest rates.

One investment tool that suitably addresses this change in circumstance is EIS.  It allows for CGT deferral so as to keep investor net worth undiminished,  Income Tax relief to bring down the net cost of investment, and Share Loss Relief to reduce exposure to company failures.  In addition any capital gains are free of tax, and EIS shareholdings are exempt from inheritance tax after two years ownership - all assisting in the maintenance and creation of wealth.  For the right client with the right circumstances these advantages can all aggregate within one subscription.


EIS investment reliefs were created by the Government to encourage innovation in the UK and create jobs in the private sector.  EIS Growth Funds are focused on investing in qualifying companies with significant growth potential.  These companies have to be early stage and unlisted (with the exception of AIM) – so by default this is classified as an ‘illiquid and high risk’ asset class. While this statement holds true of the underlying companies themselves, the layer of expertise added by successful EIS fund managers and the downside protection provided by the tax reliefs creates a material advantage to the investor, offering a real opportunity for wealth generation.

Taking the case of a buy-to-let individual now investing in EIS, using only the gain realised from residential property sales, the below example shows how CGT deferral allows for future settlement of the tax liability using a combination of reliefs and portfolio profits.

Assuming the property sale creates a gain of £100,000, on deployment of the capital the investor receives £30,000 Income Tax Relief – enough on its own to settle his/her CGT liability which at 28% would be £28,000.

The example shows a portfolio performance of 2x multiple return providing a net exit, including settlement of the deferred CGT, of £231,450 on £100,000 invested.  This does not include any future benefit of IHT exemption at 40%.  Even if the portfolio performance was lacklustre and near flat, the argument would still be extremely compelling due to the tax reliefs where on investment the combination of Income Tax Relief and CGT deferral immediately provides a 58% tax advantage over investing in say FTSE 100 stocks.

That’s a huge hurdle against which to benchmark the expected performance of other asset classes.
Summary

No one would suggest EIS as an equally weighted alternative asset class to property. That said, in that first transition out of a buy-to-let portfolio the portion of sales revenue that is capital gain is highly unlikely to find a more attractive investment than EIS.

EIS should represent a small part of an individual’s overall portfolio, however returns can outperform much larger positions in other asset classes - which is a sensible way to think about EIS allocation - higher risk for higher rewards - with a substantial downside protection buffer provided by HMRC, and an added incentive for those coming out of buy-to-let property."

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Latest Comments

Scott Garnet
Scott Garnet 06 Nov 2017

If you have a patio or a porch it is important to make sure that any connecting doors are secured. Good advice for sliding glass doors is replacing the panels with storm resistant glass and getting heavier...

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richardrawlings
richardrawlings 01 Nov 2017

What has not been mentioned here is the effect of not only higher interest payments, but also that these payments are less likely to be offsettable as a business cost due to the scaling back of mortgage...

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Kelvin Lloyd
Kelvin Lloyd 09 Oct 2017

IT is up, to the Planners. If they will only give permission for bungalows on certain (suitable) sites, they will be built.

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maggie swift
maggie swift 09 Oct 2017

It's just the beginning of the shocking rise.

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maggie swift
maggie swift 09 Oct 2017

I have recently read that the bungalows can provide social housing for elderly residents in London.

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zoe glover
zoe glover 05 Oct 2017

Update! Worst company I have ever dealt with. Undervalued a Cambridge property by over 100k, wont take on any evidence of valuation including a RICS valuation done 3 years ago for the very same value...

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Paul Edwards
Paul Edwards 27 Sep 2017

Its nonsense articles such as this that make it harder to get clients to realise just how difficult the market is out there. When you see Rightmove and there are more 'price reduced' then 'new' most days...

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Tom Allen
Tom Allen 20 Sep 2017

Absolutely agree with you!

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RyanGeo
RyanGeo 18 Sep 2017

A sharp correction would be a less dramatic expression to use. That is already underway in certain sectors in Reading where I practice as Chartered Surveyor

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sean benton
sean benton 01 Sep 2017

Identity theft is a thread for any profession. So,people should stay alarmed. I once take help from a letting agent and came to know that letting agents are taking every precaution to prevent fraudulent...

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Mark N.
Mark N. 30 Aug 2017

We have seen a surge in instructions over August and that should continue into September too.

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Chris
Chris 30 Aug 2017

Unfortunately, all the legislation bears its force on Landlords and ignores, naively, the effect of Rogue Tenants on the ability of landlords to keep houses in repair and offer properties for rent at reasonable...

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