Releasing Equity And Cgt Question. Advice/opinions Appreciated.

[C2B]

Hi,

I hope this is posted in the most appropriate section. (Apologies if it is not and could moderators move it the correct section please?)

I currently have a balance of approx. 23k on my mortgage on my one and only house. (Mortgage and title deed is solely in my name. Let us call this PROP A). This can be paid off in full by Dec 2010.

My wife and I currently have 1 child aged 1.5 years and are looking to buy another property (3 or 4 bed. the future family home. Let us call it PROP B.) when a further 17% drop occurs.

i.e. when 300k houses become 249k. (although we could offer 249k when they get listed at 275k)

Q1)

Should I consider remortgaging to release 75% equity from PROP A (valued around 230k) to use as deposit for PROP B?

• If so, would a "offset" (CAM) type mortgage be most apprpriate as it will just sit there not being charged interest on/not gaining interest. i.e. Continue to pay off 23k, keep remaining 150k in offset account.
  
• Then use the 150k as deposit for PROP B when (maybe Q4 2010) /if we find it for approx 250k.
  
• Would need another 100k mortgage for PROP B.
  
• Approx 172.5k mortgage for PROP A.
  

At this point, we intend to rent out PROP A by informing mortgage lender to switch to BTL/Consent to Let (with little fees hopefully) and on a INTEREST ONLY. The rent "should" cover the interest payments on the 172.5k and make little/no profit - therefore paying little/no tax to HMRC.

The intention would be to sell it at some point in the future if prices ever climb back up again.

Alternatively, we could sell PROP A when buying PROP B. This however will mean we forms another part of a chain.

Q2)

If we decide to rent it out and sell at a future date, am I right in understanding the current rules around CGT.

i.e. a flat 18% deduction from the profit.

I bought PROP A back in 2002 for 149k, but have spent 12k (4k on central heating, 4k on front and back garden patio/decking and 4k on double glazing).

If I were to sell (say 5 years from now) for 249k, making a profit of 100k.

Would the CGT be:

• 100k - 12k (refurb costs) - 10k (cgt allowance) = 78k profit
  
• 18% of 78k = 14k CGT payment to HMRC
  
• 249k - 14k (CGT) - 172.5k (mortgage on PROP A) = 62.5k profit
  

The 62.5k profit would then go towards paying off the 100k mortgage on PROP B.

Have I missed anything obvious? I've heard of something called 3 year grace period but don't know too much about this.

Is this 3 year grace period where I can sell within 3 years of it no long being my primary residence and not be liable for CGT?

Sorry for the long post, but if anyone is still reading and have any wise words of advice or opinions/suggestions, I would be happy to hear from you.

Many thanks.

B2C

[grizzly bear]

Broadly if you sell within 3 years of it ceasing to by your main home then there any gain totally covered by exemption. The last three years ownership are exempt.

If its more than 3 years then CGT could be due - basically you spread the gain over the total period and the period that relates to the bit where it wasn't your main residence (ie from when you moved out to the beginning of the three years before disposal) - then you can take of £40k letting relief and the annual exemption in the year you sell.

What I am not clear on is why you want to hold onto property A when you buy property B? If the rent just covers the mortgage why take the risk that prices might fall further?

[Tiger Woods?]

Hi,

Would the CGT be:

• 100k - 12k (refurb costs) - 10k (cgt allowance) = 78k profit

• 18% of 78k = 14k CGT payment to HMRC

• 249k - 14k (CGT) - 172.5k (mortgage on PROP A) = 62.5k profit

The 62.5k profit would then go towards paying off the 100k mortgage on PROP B.

Have I missed anything obvious? I've heard of something called 3 year grace period but don't know too much about this.

Is this 3 year grace period where I can sell within 3 years of it no long being my primary residence and not be liable for CGT?

Sorry for the long post, but if anyone is still reading and have any wise words of advice or opinions/suggestions, I would be happy to hear from you.

Many thanks.

B2C

I would look into this further, but I don't think your CGT calculation is correct. If I recall correctly, the base value of the house for CGT purposes is not necessarily the price it was bought at, but something like the price when you left it, or the price 3 years after it was no longer your main residence. Can't rememebr the exact details, but there was an example calculation on the HMRC website somewhere.

Edited to add - I wasn't quite correct in what I said above, but approximately so. See the following links:

http://www.hmrc.gov.uk/cgt/property/calc-cgt-09.htm

http://www.landlordzone.co.uk/forums/showthread.php?p=115795

Edited June 15, 2009 by D'oh

[LiveAndLetBuy]

Just go to a qualified accountant and pay them to look into it. It shouldn't cost more than 50 quid and you'll get up to date tax advice that should be more trustworthy than anything you read on the internet, and it'll save you days of research.

[C2B]

Broadly if you sell within 3 years of it ceasing to by your main home then there any gain totally covered by exemption. The last three years ownership are exempt.

If its more than 3 years then CGT could be due - basically you spread the gain over the total period and the period that relates to the bit where it wasn't your main residence (ie from when you moved out to the beginning of the three years before disposal) - then you can take of £40k letting relief and the annual exemption in the year you sell.

What I am not clear on is why you want to hold onto property A when you buy property B? If the rent just covers the mortgage why take the risk that prices might fall further?

Hi grizzly bear,

Thanks for replying

I've now read HMRC's HS283 Private Residence Relief (PDF 84K) and "think" I understand it better

So if I sell for 3 years after moving out I qualify for the full 40k relief as it was my ONLY primary/main residence prior to that. If I sell 4 years after moving out, 1 year would not qualify for the full 40k relief (hence the fraction )

I get the 10k CGT allowance regardless.

Correct?

The primary reason for holding on to PROP A is to avoid a chain (i.e. having to find a buyer (who could also be on a chain)). Point taken that I also take on risk that it could continue to drop further.

If I buy (what I think may be) near the bottom (Q4 2010), then perhaps there is scope for it be "back in profit" in the future. Whilst I am breaking even/making a little proft from renting it out (thinking of a 2+ year Private Sector Leasing Scheme) the risk is somewhat minimised.

Is this a bad idea?

Perhaps I should just sell PROP A to buy PROP B (and take on the hassle of a chain)

Edited June 15, 2009 by C2B

[C2B]

Just go to a qualified accountant and pay them to look into it. It shouldn't cost more than 50 quid and you'll get up to date tax advice that should be more trustworthy than anything you read on the internet, and it'll save you days of research.

I think you're right LiveAndLetBuy Thanks for the advice.

There can be quite a few permutations.

i.e. Qualifying for "Private Residence Relief" and also "Letting relief"

Thanks D'oh for providing those links.

[grizzly bear]

Hi grizzly bear,

Thanks for replying

I've now read HMRC's HS283 Private Residence Relief (PDF 84K) and "think" I understand it better

So if I sell for 3 years after moving out I qualify for the full 40k relief as it was my ONLY primary/main residence prior to that. If I sell 4 years after moving out, 1 year would not qualify for the full 40k relief (hence the fraction )

I get the 10k CGT allowance regardless.

Correct?

The primary reason for holding on to PROP A is to avoid a chain (i.e. having to find a buyer (who could also be on a chain)). Point taken that I also take on risk that it could continue to drop further.

If I buy (what I think may be) near the bottom (Q4 2010), then perhaps there is scope for it be "back in profit" in the future. Whilst I am breaking even/making a little proft from renting it out (thinking of a 2+ year Private Sector Leasing Scheme) the risk is somewhat minimised.

Is this a bad idea?

Perhaps I should just sell PROP A to buy PROP B (and take on the hassle of a chain)

well no need to do any calcs until the third anniversary of moving out, so a bit premature to be calculating!

at that point ask for professional advice.