Trapped by high gearing and CGT

by Readers Question

11:03 AM, 14th June 2014
About 5 years ago

Trapped by high gearing and CGT

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Trapped by high gearing and CGT

I purchased a 4 bed buy to let property in 2001 for £115,000 and by 2008 it was worth considerably more so I refinanced it to 85% LTV and used the net proceeds to invest into more property. I have never lived in the any of the properties. Trapped by high gearing and CGT

The properties I purchased in 2008 initially fell in value and have just about recovered to the price I purchased them at, but not quite.

I have now realised that property investment isn’t for me and I want out. I’m having to subsidise my portfolio to the tune of around £6,000 per annum and that can’t go on.

The loan on the 4 bed house is £195,000 and the value is currently around £240,000.

If I sell it for £240,000 then my capital gain will be £125,000. When added to my income this would put me into the 50% tax bracket so my CGT bill would be approaching £60,000 after using my annual CGT exemption. This is more than the net proceeds of sale.

I have spoken to my accountant and the only thing he could suggest is to go and live in the 4 bed property for a while. However, this would not be practical.

I am also concerned about the prospect of interest rate increases which may have a dampening effect on the recovery to values over the last 18 months or so.

Short of continuing to service the losses of £6,000 per annum for a few more years does anybody have any other suggestions please?

Many thanks

Anon



Comments

Mark Alexander

11:18 AM, 14th June 2014
About 5 years ago

Hi Anon

You are not alone!

There are literally thousands of landlords in exactly the same position as you. Very few people foresaw the onset of the credit crisis and believed that capital growth, low interest rates and high gearing were here to stay. Recent history has taught us otherwise.

I won't dwell on your mistake because, as I'm sure you will now realise, what you should have done is taken a much closer look at costs, serviceability and ongoing liquidity. Nevertheless, we are where we are and at least you have had the benefit of interest rates having fallen from 5% to 0.5%. It could have been much worse!

All may not be lost though and there are certainly plenty of things you can look into, the first being your costs.

Can you reduce your management costs and rental voids?

Can you reduce your insurance costs?

Can to restructure your finances?

You have mentioned the values and lortgages on the properties you purchased in 2008 but I'm going to hazard a guess that you also borrowed 80% to 75% LTV on those. From what you have said, you are probably back to where you were in 2008 in terms of gearing.

You might wish to consider swapping some mortgage debt for equity debt, i.e. reducing the LTV on your mortgages to 65% by taking 20% Equity Finance on a second charge which attracts no interest whatsoever. Details about equity finance can be found via this thread and another much longer discussion which is linked from the final sentence >>> http://www.property118.com/equity-finance-for-buy-to-let-landlords/44713/

I would also recommend you to read this page regarding money saving tips for landlords >>> http://www.property118.com/landlords-money-saving-tips/64261/

We can GUARANTEE to save you money on your landlords insurance and if you are using a traditional high street letting agent to manage your property we can probably help you to halve your costs there too.

Good luck and I hope the above proves to be helpful 🙂
.

Anon

11:29 AM, 14th June 2014
About 5 years ago

Reply to the comment left by "Mark Alexander" at "14/06/2014 - 11:18":

Thank you for your suggestions Mark.

I don't think refinancing will work for me because the deal I'm on is only costing me just over 2%. It is BM Solutions tracker rate mortgage. If I was to start again, even at 65% LTV the higher rates and arrangement fees available today would negate any savings.

I manage my own properties, I only use a letting agent to find tenants for me.

I will give your insurance people a shot though.

Mark Alexander

11:34 AM, 14th June 2014
About 5 years ago

Reply to the comment left by "Anon " at "14/06/2014 - 11:29":

Dear Anon

Who said anything about refinancing? You may be able to simply swap a portion of your BM Solutions mortgage for Equity Finance 🙂

With regards to self managing, this isn't necessarily the most cost effective option either. How much do you pay your agents to find you tenants, do professional inventories etc.? The agents we recommend only charge £34.99 pcm and nothing up front to landlords. Also, given that your heart is no longer in this business, perhaps they might do a better job, thus reducing rental voids and finding you more cost effective maintenance contractors? Just a thought, why not try them on one property next time a tenant vacates and then compare the costs over the next year?

You will not be disappointed with the insurance quote 🙂
.

Anon

11:36 AM, 14th June 2014
About 5 years ago

Reply to the comment left by "Mark Alexander" at "14/06/2014 - 11:34":

Hi Mark

Are you suggesting that my BM Solutions mortgage could remain intact at current rates?

Interesting food for thought, thank you.

Mark Alexander

11:36 AM, 14th June 2014
About 5 years ago

Reply to the comment left by "Anon " at "14/06/2014 - 11:36":

Yes! 🙂
.

Monty Bodkin

11:39 AM, 14th June 2014
About 5 years ago

How long have you been running a 6K loss?

If it is coming up for 10 years then that is a cumulative loss of 60K.

Although you can't offset the losses against your earned income, I'm pretty sure you can offset it against your capital gains. Obviously your accountant should know for certain.

Additionally, if you really want out, sell the 2008 properties you have lost on and use those losses to offset the 60K gain, in the same tax year.

If you are making a 6K pa loss, you need to look at making your portfolio work harder (and perhaps yourself). For example, could the 4 bed be used for student lets, professional house share? Are you doing regular rent reviews? Could you ditch your accountant and DIY? He doesn't seem very competent- IANAA, BTW.

Anon

11:47 AM, 14th June 2014
About 5 years ago

Reply to the comment left by "Monty Bodkin" at "14/06/2014 - 11:39":

Hi Monty

I have every faith in my accountant and he assures me that my accumulated rental losses cannot be used to offset capital gains.

I wouldn't lose or gain much at all if I was to sell the properties I acquired in 2008.

Thanks for your suggestion regarding house share. I have previously shied away from this based on the nightmare scenario's I've hard and read on this website. However, if I do talk to Mark's recommended letting agents I will mention this and see what they have to say.

Please keep the suggestions coming.

Monty Bodkin

11:54 AM, 14th June 2014
About 5 years ago

Reply to the comment left by "Anon " at "14/06/2014 - 11:47":

accumulated rental losses cannot be used to offset capital gains.

Just had a quick search and he's right (sorry, should have checked before posting).

Have you worked out your CGT at 50% or 28%? I work it out more like 32K.

Anon

12:10 PM, 14th June 2014
About 5 years ago

Reply to the comment left by "Monty Bodkin" at "14/06/2014 - 11:54":

It would be 50% unfortunately 🙁

Monty Bodkin

12:14 PM, 14th June 2014
About 5 years ago

Are you sure? Have you got some special circumstances?

http://www.hmrc.gov.uk/rates/cgt.htm

Working out your Capital Gains Tax for 2013-14
You need to work out your total taxable income before working out which Capital Gains Tax rate to use.
First work out your taxable income by deducting any tax-free allowances and reliefs that you are entitled to.
Next see how much of your basic rate band is already being used against your taxable income. The basic rate band for 2013-14 is £32,010.
Allocate any remaining basic rate band first against gains that qualify for Entrepreneurs' Relief - these are charged at 10%.
Next allocate any remaining basic rate band against your other gains, these are charged at 18%.
Any remaining gains above the basic rate band are charged at 28%.

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