Taxation strategies for capital raising on a BuyToLet basis for retirement

It is quite rare for me to share taxation strategies here in full on my blog, especially taxation strategies for capital raising purposes which I’ve not used personally yet (but intend to). However, following an email from a reader called Mike today I will make an exception on this occasion. I love to share my strategies bit by bit but I often miss out some key elements, either to encourage further conversation or to provide enough intrigue for my readers to want/need to contact me personally. I explain why I do that here.

Mike wrote to me as he is currently going through a tax investigation and from his email it is quite aparent that he has a decent understanding of landlord taxation. Mike’s email raised questions regarding an article I recently published about “Partial Exit Strategies for landlords“, and in particular the taxation strategies for capital raising as referred to in that particular article.

The article referred to above was based on a scenario from another reader who had emailed me. His mother had purchased a property 43 years ago which is now worth £650,000. Mike estimated that she would have paid around £2,000 for it.

As Mike rightly pointed out in his email, if the property was refinanced to raise additional capital then only the interest on the first £2,000 of the loan (i.e. up to the initial purchase price) could ordinarily be offset against rental profits. The obvious exception to that being if the additional capital is reinvested into the BuyToLet business, to purchase more properties for investment purposes for example.

There is, however, a way around this for married couples which I discovered back in 2006. I shared this whilst presenting a CPD (Continued Professional Development) seminar for Norwich accountants. I believe the professional body was the AAT (Association of Accounting Technicians) but it may have been the ACCA (Association of Chartered Certified Accountants). My presentation was entitled “Milking the BuyToLet” and was subsequently shared as a briefing to members of at least one of the professional accountancy bodies .

Milking the BuyToLet

There is no capital gains tax (CGT) on transfers of property between spouses. Stamp duty is payable though unless you are getting divorced and the transfers are court ordered. Transfers between spouses (or Civil partners) do not affect the base cost of a property for CGT calculation purposes when it is eventually sold to a third party (i.e. not a spouse or civil partner) but a strategy of selling properties between spouses can be used to good effect for income tax purposes.

Let’s play this out by way of the example referred to in my previous article and Mike’s email. Let’s say Mrs X purchased her property 43 years ago for £2,000 and it is now worth £650,000. Let’s also assume that Mr and Mrs X are married.

Mrs X can sell her property to Mr X for £650,000 as a CGT exempt transfer between spouses, even if she only married him yesterday. Mr X can borrow money to fund the purchase, even if he is 70 years of age too – see this article by Neil Patterson – Mr X could even be up to age 75.

The new loan taken by Mr X is being used to purchase a BuyToLet property and therefore interest on that loan may be used to offset against rental profits.

Result = capital raised without incurring CGT whilst being able to offset 100% of the loan interest against rental income.

Legal note – I am now a retired adviser so this article should not be constituted as professional advice. I am sharing this information to demonstrate the importance of having good professional advisers. If you would like me to refer you to my own trusted professional advisers please feel free to email me at mark@property118.com

If you do choose to email me, please provide an outline of your circumstances,  the more information you can provide the better please. The quality of the information you provide will affect the quality of my recommendations and I do like to recommend the right professional adviser(s) first tme around wherever possible as I don’t like to waste anybodys time, especially yours, my professional contacts or my own.

By all means leave comments or further questions in the comments section below too. I prefer to engage online as this avoids me having to answer several emails asking the same questions over and over again.

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