Take the money?

ukdan

When I emigrated from Blighty I kept my house and rented it out. Like a lot of expats the house was going to be part of retirement planning.

Now since April non-residents are liable for CGT on property gains since April. Gains prior to April are not taxed. Based on a RICS valuation I got I have £250,000 of tax-free gains locked in.

But I was thinking if inflation is say 2.5% then the real value of £250,000 would be worth 20% less after 10 years and 40% less after 20 years. But then I thought some more and even if house prices were to only keep pace with inflation, then the decline in real value of my £250,000 would be more than offset by further overall gains even after CGT.

This is not a question about the overall merits of buy-to-let versus other investments. My question is more specific:

Is there a clear logic or maths that demonstrates whether I should sell the house and take the locked-in gains and invest them elsewhere, or keep the house and continue to use gearing (mortgage now 40% LTV) to do the heavy lifting in generating overall returns?

kidmugsy

ukdan wrote: »

Is there a clear logic or maths that demonstrates whether I ...

It is notorious that the value of equities goes up and down. You know, by assumption, that the value of your house can only go up. A geared investment in something that can only go up is surely very attractive.

ukdan

kidmugsy wrote: »

It is notorious that the value of equities goes up and down. You know, by assumption, that the value of your house can only go up. A geared investment in something that can only go up is surely very attractive.

A very strong argument. Thank you.

bigadaj

kidmugsy wrote: »

It is notorious that the value of equities goes up and down. You know, by assumption, that the value of your house can only go up. A geared investment in something that can only go up is surely very attractive.

That's a bit naughty.....

kidmugsy

ukdan wrote: »

A very strong argument. Thank you.

It was sarcastic.

ukdan

kidmugsy wrote: »

It was sarcastic.

I thought you were being helpful. I don't want to provoke any further scorn as my question was genuine.

bigadaj

ukdan wrote: »

I thought you were being helpful. I don't want to provoke any further scorn as my question was genuine.

Your initial statement is contradictory.

You say it isn't a comparison of property versus shares or other asset classes, but it fundamentally is. No difference at all, you have to assess what your return on each asset class might be, and then plug those numbers into a model.

My personal view is that UK property is probably more over valued than equities currently, they have been pushed to a high with zero interest rates, and whilst demand is still high, if people can't afford or be seen to meet the lending criteria then prices must stop going up at some point.

Kidmugsys ironic/ Sarcastic post was correct, you refer to leverage doing the heavy lifting, but how would leveraging be viewed in relation to equities, you may well see this as a crazy thing to do, in which case why should a similar approach be sensible for property?

kidmugsy

ukdan wrote: »

I thought you were being helpful..

It was helpful: it focusses attention on the flaw in your logic.

ukdan

kidmugsy wrote: »

It was helpful: it focusses attention on the flaw in your logic.

OK. I can't see the flaw in my logic. If I keep the house every 1% gain will be amplified by the total value say £600K = £6,000. But the £250K which I can take at any time tax free will over a 20 year investment horizon lose 40% of current value to inflation. Or I can sell and take the £250,000 of capital gains to date tax free, and investment that elsewhere. But that £250,000 is going to have to work over twice as hard for each £6,000 return (2.4%).

I am trying to ascertain which strategy gives the most potential up-side long term.

Can you point out the flaw in my logic in using the factors I am outlining, and therefore what you think the correct logic points to in terms of my original question, i.e. keeping the property, or taking the £250,000 and investing it elsewhere (in my case it would have to be global index tracking funds - buy and hold forever - I'm not into anything more complex or fancy with my 20 year + investment horizon)?

Many thanks!

kidmugsy

The flaw is to assume that the value of the house must always increase. See this thread:
https://forums.moneysavingexpert.com/discussion/5272818

ukdan

I am not assuming house prices will always rise - all investments go up and down. But I did suggest using an average 2.5% annual increase over a 20 year period. Obviously no-one knows what will happen tomorrow, but I wanted to suggest some figure as a starting point for comparing with the alternative.

But anyway, if it will just send us round in circles to suggest that putting any figures in the gaps is a waste of time, then how else can I decide on my question? Note I am not asking for opinions on which will perform better, property or stocks, but trying to get some clarity on whether the effect of inflation on the £250,000 locked-in capital gains is a red herring when balancing this against the fact that the house is a geared investment which can therefore offer better returns per pound tied up.