Trapped by high gearing and CGT

Trapped by high gearing and CGT

11:03 AM, 14th June 2014, About 10 years ago 37

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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


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Comments

Bill Morgan

10:06 AM, 21st June 2014, About 10 years ago

One other possibility is to split the 4 bed house into 2 flats and sell them in different tax years.

2 flats will bring in more income than a 4 bed let to a family.

Jon Jon

18:38 PM, 21st June 2014, About 10 years ago

I'm no expert but isn't there some taper relief on the CGT as well? Re Mortgage Express, not sure why everyone has such a downer on them. I have one mortgage with them and it's far and away the cheapest. They've been very fair with passing on base rate reductions.

Also, if you're making losses on your properties, don't you end up with a tax rebate when you do your annual returns?

Yvette Newbury

3:24 AM, 22nd June 2014, About 10 years ago

I'm a little late to join the discussion but I've read through all the posts and your responses, Anon. If you want to reduce your rental properties because you are fed p with the game (I don't think you say how many you have) then you could pick out those that do not give you a massive CGT gain to sell now but do try to keep 1 or 2, those with the biggest gain and/or those that are easiest to rent/are in good condition so that you can use your rental losses brought forward against future rental profits. I recently structured something like this for my brother-in-law who was fed up and wanted to sell everything, but he had a decent amount of losses that would have been wasted if he had sold everything in one go. This also gives you the benefit of your CGT allowance in the next tax year if you sell another in a year's time, so waiting does not limit your options. You may have changed your mind by then too! You may also just need a break and I know if I was considering something like this I would certainly be looking at Mark Alexander's suggestion of the low cost agents he recommends. You don't want to look back in 5 years time having sold everything and wish that you still had 1 or 2 properties when all you needed was a little help right now. Good luck to you, hope you can make it work.

Anon

14:02 PM, 22nd June 2014, About 10 years ago

Update:

Over the next few weeks I am planning to arrange meetings with all of my tenants with a view to negotiating a rent increase to more realistic levels. I accept that some will agree and some will move out.

Where tenants give notice I will re-advertise the property at the increased rent to establish demand and tenant quality through Mark's recommended letting agent. If interest levels are low I will sell those properties, save for the 4 bed house which I am now convinced will achieve a much higher rent by letting to sharers. That's also the one I'd pay the CGT on if I was to sell.

I will not be restructuring my finances using Equity Finance. I would be crazy to do so as the minimum return for the financier is only marginally lower than I am already paying but the upper end cost is at least double what I borrow as a percentage of capital appreciation which is only limited by market conditions.

Mark's recommended insurers will save me around 50% of premiums so I am certain I will be switching to them as and when the policies come up for renewal.

Fred Bloggs

13:54 PM, 2nd July 2014, About 10 years ago

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

Perhaps I'm missing something but you say you re-financed for 195,000 pounds when initialy you paid 115,000 pounds for the property, so you must have put at least 80,000 pounds into the new properties, so if have you selling these as well, that would give you the 80,000 pounds back of which you havn't mentioned !

Anon

13:38 PM, 8th July 2014, About 10 years ago

Reply to the comment left by "MELVIN EDWARDS" at "02/07/2014 - 13:54":

Hi Melvyn

This has been mentioned.

My initial concern was the tax. However, I have learned that it will be much lower than I originally thought and I now realise that I am in the same position as I was when I initially remortgaged if I sell up now. However, thanks to the advice I have had from Property118 members the option to sell up is no longer as appealing. I now realise where I was going wrong and I am in a position to transform losses into profits. Three of my tenants have already agreed to a rent increase and negotiations are ongoing with others. Various recommendations via this thread have also reduced my costs and are likely to continue to do so. I also feel far better informed and able to reduce rental voids which were a another major cause of my rental losses.

Accordingly I have decided to use my retained losses to offset the profits I am now far more likely to make. Only time will tell whether or not this is the right decision but I am certainly far more optimistic about my future in property investment than I was just a month ago.

Thank you to all who have contributed to this discussion thread and I hope that others in my position will be able to lean from it for many years to come. Chances of that are good I think because I searched "Trapped by high gearing and CGT" and this discussion thread was the top search result in the Bing search engine and also Yahoo and Google.

Anon

15:17 PM, 8th October 2014, About 9 years ago

Reply to the comment left by "Anon " at "08/07/2014 - 13:38":

Update:

I am now making a profit and with a bit more fine tuning will soon be improving on the position further. I have not sold any of my properties.

Thank you all for your valuable advice and I have made a £200 donation to support the ongoing costs of running Property118.

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