capital gains tax on selling property

Mrs_pbradley936

lucyandcarl wrote:

Thanks so much for your advice, our Financial Advisor has advised us to keep the property, borrow as much as possible on it,pay off current higher interest borrowings and put some money into high interest accounts. From what I understood, he said to get an interest only mortgage and off-set the interest off our overall tax bill, we are also self employed shop owners you see.

The rent from the properties would cover mortgage payments...your opinion on his advice would be appreciated.

I like that advice - in fact it is the arrangement I have. My account is with Barclays/Woolwich and you only pay interest on what you are borrowing at the time. So if you have the 3 flats let out for say £500 each per month that is £1500 you are not borrowing that month (and every month for as long as the rent comes in). You have to link it all up with your current account, we have 4 accounts all linked with each other and it works extremely well.

blondie21

lucyandcarl wrote:

Anyone help with advice on tax on a second property? Basically we have a second property which we brought for £52,500 5 years ago, we have coverted it into 3 flats and it is now worth £300,000. We have been initially told that capital gain tax would be applied to most the profits on it at 40%, the precentage decreasing over time. Just asking for anyone to advise us whats best to do with it etc, we need to get some money out of it but selling it at the moment would be criminal! Any tips would be appreciated.

Does that mean the longer you have the property the 40% of the amount could reduce to a lower percenatge ? over whAT PERIOD ?

Mrs_pbradley936

blondie21 wrote:

Does that mean the longer you have the property the 40% of the amount could reduce to a lower percenatge ? over whAT PERIOD ?

There is something called taper relief and I think you have to have owned the property for at least 10 years. As I said in an earlier post I have never used this myself so am not totally sure of the facts around it. Someone in the know is sure to answer soon.

martini99_2

CGT generally, and on second homes particularly, is complex. That's the bad news. The good news is that good advice can help you avoid (not evade) a fortune. Nobody has yet mentioned that you can get up to £40,000 by way of lettings relief for instance in addition to allowances and allowable costs.

Without wishing to knock your financial adviser, you really need to be talking to an Accountant. Expect a no obligation, no fee first meeting.

Vincenzo

martin2005&#64 wrote: »

CGT generally, and on second homes particularly, is complex. That's the bad news. The good news is that good advice can help you avoid (not evade) a fortune. Nobody has yet mentioned that you can get up to £40,000 by way of lettings relief for instance in addition to allowances and allowable costs.

Without wishing to knock your financial adviser, you really need to be talking to an Accountant. Expect a no obligation, no fee first meeting.

Martin2005, I was not aware that lettings relief was available on this type of property. Can you expand at all?

Also on the issue of borrowing heavily and offsetting the interest against the rental income - as I understand it you can only offset the mortgage for the original outlay (ie the purchase price). So if you pay £250,000 and borrow £200,000, you can offset the interest from the £200k mortgage. If you later borrow a further £25k, the interest from this amount cannot be offset.

This is not to say that people do not do so but I am pretty sure that this is outside of the tax rules.

silvercar

you can offset the interest upto the value of the property when you started letting it.

silvercar

Here is a good place to start:

http://www.hmrc.gov.uk/pdfs/2003_04/capital_gains/ir283.pdf

Pennywise

martin2005&#64 wrote: »

Nobody has yet mentioned that you can get up to £40,000 by way of lettings relief for instance in addition to allowances and allowable costs.

Which would only be available alongside a principal private residence exemption - so you would have had to live in the house as your home before you are entitled to this.

Vincenzo

silvercar wrote:

you can offset the interest upto the value of the property when you started letting it.

Thanks for the link Silvercar.

One thing I am not clear on:

If I let out a property and later borrow on it, provided that I did not borrow more than the property was worth at the original point of letting would I be able to offset the interest on the new loan too?

silvercar

Vincenzo wrote:

Thanks for the link Silvercar.

One thing I am not clear on:

I was to let out a property and later borrow on it, provided that I did not borrow more than the property was worth at the original point of letting would I be able to offset the interest on the new loan too?

Yes. A lot of people will intially borrow 60-80% of the property value. As prices increase they release equity from this house to act as a deposit on their next property.

You can of course borrow whatever anyone will lend you on a property. The restriction is on the tax relief. Say you bought a property in 1980 for £50k with a £40k mortgage, so you get tax relief on the interest payments on £40k. Then in 1990 you borrowed a further £10k as the value had shot up to £100k. You could then get tax relief on interest payments on £50k. If in 2000 it is worth £200k you could borrow more money if you wanted but you wouldn't get any further tax relief above the £50k original value.

Looking it another way if you buy a £100k property with an £80k mortgage on it and raise the remaining £20k by increasing the mortgage on your PPR, you can get tax relief on interest payments of £100k as that is money raised for the purposes of your business. Where (or indeed if) it is secured is not relevent.
Hope that helps.