Objective Based Questions Buy to Let

Question 1

Explain to Tom and Sally the tax implications of owning a buy-to-let property (9)

Answer 1

If in joint names, taxable rental income will be split between Tom and Sally and
added to their respective incomes for the year
 After deducting fees and expenses such as agent’s costs and property repairs
 Which means Tom would pay 40% on his half of the taxable rental income, and
Sally would pay no tax on her half
 Any taxable gain on disposal would be subject to 28% CGT for Tom and 18% for
Sally
 After deducting allowable expenses and both of their respective CGT exempt
amounts (£11,700 for 2018/19)
 Mortgage interest relief allows 50% of any mortgage interest to be offset against
rental income, the other 50% given as a basic rate tax credit in this tax year
 By 2020/21, all mortgage interest relief will be at the basic rate
 Making it more tax efficient for any second property to be in Sally’s sole name

Question 2

Comment on how a mortgage taken out to purchase a buy-to-let

mortgage is likely to be regulated, and what this means for Tom and Sally. (9)

Answer 2

Assuming that all other criteria for a regulated mortgage are met, their new BTL
mortgage would be a regulated mortgage contract
 because the property being purchased is to be occupied by a member of the
borrower’s close family (Hannah in the final years of university),
 making any mortgage taken for this purpose by Tom and Sally mortgage a consumer
buy-to-let (CBTL)
 Lenders must have in place a policy for assessing affordability of a new regulated
mortgage, including CBTL,
 which takes account of the borrower’s existing expenditure and permits a borrower
to only commit a certain percentage of net available income after these expenses to
new mortgage costs
 The affordability assessment must also prove that the borrower can still afford the
new mortgage after taking account possible interest rate rises called a ‘stress test’
 The interest rate used for the stress test is at the discretion of the lender, but must
take account of the current recommendations of the Financial Policy Committee
 If the tenant is not family, the mortgage would be a business buy-to-let and
unregulated
 As a regulated mortgage, Tom and Sally would have to demonstrate they have a
credible repayment strategy for the mortgage

Question 3

Explain to Tom and Sally the benefits of taking a buy-to-let mortgage to
purchase the property rather than using their existing investments (7)

Answer 3

Existing investments available for other financial aims
 There may be a CGT liability on selling existing unit trusts
 Might have to sell investments at a time of market instability
 After Hannah finishes university, rental income covers mortgage payments
 as mortgage interest rates are still quite low
 Avoids having to encash the substantial tax-free ISA holdings they have accumulated
 Mortgage interest relief, although only at 20% after April 2020

Question 4

Explain to Tom and Sally the option of gifting money to Hannah for her to
purchase the property in her own name, rather than buying it themselves (7)

Answer 4

Lower Stamp Duty Land Tax liability buying in Hannah’s name as a first-time buyer
 Tom and Sally would pay 3% SDLT surcharge, Hannah would be exempt as the
purchase price is likely to be below £300,000 (FTB relief)
 Hannah would be on the property ladder at a young age
 The transfer would be a PET for IHT purposes
 They could also use their annual gift exemptions if unused and would be exempt from IHT after 7 years
 Reducing the value of their estates, and cost of protecting the remainder
 Making this gift would reduce their available assets
and, therefore, their ability to meet their other financial objectives
 Loss of potential rental income they expected to receive from the BTL

Question 5

Comment on the suitability of a buy-to-let property investment for Tom and
Sally in their current circumstances. (9)

Answer 5

Tom and Sally do not have any experience of investing in property and letting it out
• They may need to hire a professional letting management company
• which would reduce the yield on the property
• There will also be substantial initial and ongoing costs which they may not have
considered
• They also need to ensure that their existing mortgage is repaid before retirement,
and they have other objectives that need to be met
• While the couple are living on one income at present
• Directly investing in property is a higher risk investment
• Which matches their adventurous medium attitude to risk
• Especially if they opt for using an interest only mortgage