sell or keep BTL?

SpendingMoney

I bought a flat in 2002, which I lived in for 2 years, then moved in with my partner. I rented it out ever since but am now at a bit of a crossroads in my life and trying to work out the best thing to do.

The rental income is currently around 10K annually but it's on an interest-only mortgage which costs around £5300. Add in agency fees (1.2K) repairs etc (£600) insurance - by the time I pay tax at 40% there is no profit at all - which I am ok with as there has been good capital growth.

I bought it for £77000 in 2002 and it's now worth around £230,240 so CGT would be huge if I did sell - did put in a new bathroom but that was around £3k many years ago so there's nothing much that can be offset.

I'm about to receive an inheritance, which would pay off the mortgage, but with all the recent legislation (and worse to come in Scotland) I wonder whether it's really worth it, from purely a financial point of view.

So is it worth paying off the mortgage and having a bit of income from it (albeit it taxed at 40%) or would I be better selling it (and CGT costs) then reinvesting in ISA's.

Thoughts welcome

Stubod

..sell…sell…..sell…!! Not much point in being a single property landlord, too much legislation, too much hassle…IMHO…

El_Torro

One option would be to set up a Limited Company and put the flat into that. You have to pay Capital Gains Tax and Stamp Duty, that’s where your inheritance comes in. It’s only really worth doing if you plan to stay in the BTL business for years to come.

Ultimately it’s a personal choice. Based on your post I’d be inclined to sell.

It also depends on what other investments you have. If you already have a decent pension and ISAs then that’s a point in favour of keeping the flat.

SpendingMoney

Thanks for your comment - I hadn't thought of a Limited Company - I'm in Scotland where we have an additional buyers tax if you already own a property at 8% so am guessing that would add an extra £18k to the usual £1800 - assuming I'd pay that on the whole transaction…..

Am a single parent in my 50's with 2 teenagers and work for the NHS, although some of it part time -so pension is ok but not great.

UKTaxHelper

You lived in it for two years, so not all that gain is taxable. Those years plus the final nine months of ownership come off as private residence relief. Worth running the numbers before you write off selling.

Albermarle

I do not know about Scotland but the current sales market for the UK in general is rather quiet, and flats in particular are proving very difficult to shift.

So be aware that a recent valuation from an estate agent, will maybe prove to be a bit overoptimistic and you could be in a long wait to sell.

Of course if the flat and/or location are very desirable, then you should be OK. Otherwise might be worth hanging on until the market picks up.

The Nationwide index for Scotland says from 2022 to 2026, house prices rose 168% . Your valuations show a rise of 200%., which of course is possible, but maybe a bit on the high side ?

SpendingMoney

thanks for the comments, the market in the area is very strong (it's a bit hipster now!) and flats go very quickly at well over the "offers over" price, so I feel ok about that - there are tenants in now so I'd have to give them notice or could do it at the next changeover - my BTL mortgage is due up in May next year so could wait for the spring market.

I bought in in 2002 for 77K, not 2022

I've asked for a CGT calculation to help make the decision - at least I have a bit of time to decide.

sherlock228

https://forums.moneysavingexpert.com/discussion/comment/82112065#Comment_82112065

CGT calculation is straightforward, for illustration I will do in years, but for HMRC it should be in months (or days if you want to ultra precise). I shall assume sold this year, using the figures you mention, and that it is in your sole name as owner.

Ownership period: date of purchase 2002 - date of sale 2026 = 24 years
Private residence relief (PRR): Lived in as main home: 2 years + final 9 months of ownership (whether let or vacant matters not in those 9 months or 9/12 ie 0.75 of a year) = 2.75 / 24 = 11.5%

Gross gain
Selling price £230,000 (less EA & legal selling fees) - purchase price £77,000 (plus any legal fees and LBTT paid on purchase) = 153,000

Net taxable gain
153,000 - PRR (153,000 x 11.5% = 17,595) = 135,405 less CGT personal allowance £3,000 = £132,405

CGT payable
You state you are already a 40% (income) taxpayer so the CGT rate will be all at the higher rate of 24% on all of the net gain, so £ 132,405 x 24% = £31,777

Net cash after tax
230,000 - 31,777 = 198,223
obviously the mortgage will still need to be repaid in full from that net

poseidon1

Addressing the idea to Incorporate.

Since the property generates just £10k per year this would seem to be a waste of time.

You will have additional company accounting and compliance costs that will likely partially outweigh the impact of the Section 24 reduction to your income tax relief on mortgage payments, not to mention Scotland's LBTT charge on reacquiring the property in the company. You could borrow more at company level to cover the LBTT, but that impacts on the rents after tax by virtue of increased interest charges.

The company will incur annual corporation tax at 19% on the net rentals, leaving you with a bit more income in the company than if the rents were taxed on you personally. However if you wish to access this net amount for your own use you would face higher rate dividend tax, which defeats the point of incorporation if you were seeking an increase in net rents in your pocket after income tax.

Depending on what form incorporation takes ( wholly exchange for shares or part shares part directors loan), there maybe a nil CGT entry charge or partial as explained below-

https://www.stratostax.co.uk/insights/capital-gains-tax-on-incorporating-a-property-business-incorporation-relief/

A partial charge would be undesirable in generating an additional incorporation cost.

Finally, if you are retaining your current level of mortgage funding, the liklihood is new lending will be required on slightly higher interest terms and associated fees thereon. Your current lender is unlikely to countenance novation of the exsisting loan.

All in all not an especially advantageous option for the small single property landlord with modest rent, bearing in mind upfront liabilities and new additional running costs, and certainly not the 'no brainer' it is often presented as.

UKTaxHelper

One thing on sherlock's numbers, the 24% might not cover all of it. CGT works off the UK basic rate band, not the Scottish one. So someone paying 42% in Scotland can still have room left where part of the gain only gets 18%.

tacpot12

As you are thinking of selling, I would be inclined to go ahead. The CGT regime might change in future years but it's not that likely to do so. You haven't said whether you own the home you live in. If you didn't, the flat is a useful hedge against rising property prices (Conincidentally, I also own a flat that I rent out. I plan on keeping it for the long-term because I live with my partner and don't have any financial interest in her home, so the flat will either be a property I can move to or give me a hedge against rising property prices in the area if/when anything happens to her).

If you are in good health and have healthy parents, I suggest you use the proceeds to look at buying the maximum amount of additional pension that you can within the NHS Pension scheme, and then look to invest the rest in a mixture of SIPP and ISA. You might want to take some professional financial advice at this time from a Financial Planner who can help you construct a plan to get you to your intended retirement age in the best financial shape. (My partner worked in the NHS part-time for many years and was able to buy additional pension years in the 1995 NHS Pension Scheme that meant her pension is quite reasonable now she has claimed it).