Equity Loan and offsetting CGT?
I am wondering if anyone has had any experience or knowledge of Equity Loans and how they may be treated as an expense or offset against CGT.
Briefly, I took an equity release loan on a property that used to be my residential home which I subsequently let as a BTL. This helped me build my BTL portfolio. I recently redeemed this product as prices were continuing to rise rapidly and I also wanted to transfer a share to my partner.
With this equity loan product, I paid no interest and the lender held an equity share benefiting from price increases. The product has proved quite expensive as prices have risen but it did help me early in my property journey.
Can anyone tell me how the redemption cost in excess of the original loan (over £30k) could be treated for tax purposes? In my view it’s not interest as it’s based on capital appreciation. My accountant is not a property expert and seemed to think it could be offset against future CGT, hence, the question. CGT would be my preferred position, however, if its interest it would have to be applied in the year it arises (and result in rental losses).
I have only been able to find one very old thread about it where Mark Alexander indicates that it’s unclear how it will be treated by HMRC.
If anyone can help or signpost me to further information and advice that would be great.
Great site, keep up the good work.
Adrian
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Member Since January 2011 - Comments: 12216 - Articles: 1412
3:12 PM, 28th April 2022, About 4 years ago
Hi Adrian
I also took a few of these loans, mine were with Castle Trust. I have since redeemed some of them, so I’ve been through exactly the same questions as you.
The way mine worked is that I made no monthly payments, but on redemption Castle Trust took the greater of a percentage of capital growth or 2.5% per annum.
HMRC were consulted by Castle Trust on this and were able to share with me the HMRC response, which in summary said that the minimum 2.5% per annum would be regarded as interest and anything over that would be regarded as capital, i.e. offset against capital gains tax.
I hope that helps?
Member Since December 2014 - Comments: 52
3:39 PM, 29th April 2022, About 4 years ago
Mark thanks for the information.
I also used Castle Trust and their gain was a profit share of the increased value. It was not based on a percentage interest rate just a multiple of the property value. That’s why I am thinking it should be capital as opposed to revenue (interest).
My experience of contacting HMRC is not good however I could write to them for clarification. presumably the CGT team.
Member Since January 2011 - Comments: 12216 - Articles: 1412
3:44 PM, 29th April 2022, About 4 years ago
Reply to the comment left by Adrian Alderton at 29/04/2022 – 15:39
Hi Adrian
My recommendation is that you write to Castle Trust.
They should then share with you the correspondence they had on this topic with HMRC.
I suspect you took the same deal as I did and the outcome will be as I have described above.
Member Since December 2014 - Comments: 52
4:04 PM, 29th April 2022, About 4 years ago
Good thinking. I’ll do that.
regards
Member Since December 2014 - Comments: 52
10:15 AM, 3rd May 2022, About 4 years ago
Just for information. Didn’t get anywhere with castle Trust who just batted it back saying – We have not received any confirmations from HMRC.
I’ll go back to accountant and make a couple more enquiries and let you know if i make any progress.
Member Since January 2011 - Comments: 12216 - Articles: 1412
1:07 PM, 3rd May 2022, About 4 years ago
Reply to the comment left by Adrian Alderton at 03/05/2022 – 10:15
I don’t know who you spoke to at Castle Trust but I can assure you the response you received was BS. My accountants can confirm this, and if you instruct them they will share the correspondence between HMRC and CT with you. Contact Neil Barlow on 01603 630684.
Member Since December 2014 - Comments: 52
2:03 PM, 3rd May 2022, About 4 years ago
Thanks for the information