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Discussion With A Btl Tonight

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I had a very drunken discussion with a work colleague tonight. It turns out that he has a BTL and the discussion turned to ways of making money and then onto the tax position you face when BTL. I did warn him I'd bore him silly if he kept on talking (believe it or not I didn't start the discussion!).

The figures are changed to protect the innocent:

You buy a house for £100k

Then the house rises in value to £150k

You remortgage the house to £150k and spend the £50k "profit" on a deposit to bu yourself a family home to live in.

The house then rises to £200k

You decide to sell but to avoid having to pay any capital gains tax you sell it for £150k

His argument was that because he'd mortgaged the property to a total of £150k and then sold it for that value, he had no capital gains tax to pay due to the fact he sold for the same value as his overall mortgage. My argument was that the tax man couldn't care less that he'd remortgaged and now owed an extra £50k. He'd have to pay capital gains on the profit from £100k to £150k, possibly minus some small amounts offset to allow for maintenance and improvement.

When the discussion turned to inflation I just couldn't get through to him that 2.4% inflation (or whatever it is) means he must make 2.4% profit per year to even break even (and more if you want to take opportunity cost of investment into account). His opinion was that as long as he got his capital back then he was in no worse position than the previous year.

It just amazes me...

His parting words were "I hope you're not right but I'm sure you're not".

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hmmm....you are!

think he needs to study economics a little more carefully!

Hehe I put that to him too. I asked what research into the market and his tax position he had done to support his new business venture. His reply was that his BTL wasn't a business but simply an investment for the future.

err wtf? That's ok then :P

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He's made a classic mistake. Capital gains is due on the difference between the sale price and the inflation adjusted purchase price. He needs to enough money to pay the capital gains off on the £50,000. If he had a clue he would sell for £180,000 (if thats below the market value which I doubt) and use the £30,000 to pay the large bill that would otherwise appear.

Its the remortgaging to buy BTL 2, 3 and 4 which I find hilarious. Its fine on the way up but how do you extract yourself from down the line when the taxman wants the gains on house 1 and 2 which are unfortunately tied up as the negative equity of offplan flats 3 and 4.

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He's made a classic mistake. Capital gains is due on the difference between the sale price and the inflation adjusted purchase price. He needs to enough money to pay the capital gains off on the £50,000. If he had a clue he would sell for £180,000 (if thats below the market value which I doubt) and use the £30,000 to pay the large bill that would otherwise appear.

Its the remortgaging to buy BTL 2, 3 and 4 which I find hilarious. Its fine on the way up but how do you extract yourself from down the line when the taxman wants the gains on house 1 and 2 which are unfortunately tied up as the negative equity of offplan flats 3 and 4.

Other than declaring it on your tax return, is there any way that the taxman can see you've made a capital gain? I have a relative who claims he never paid it on a second home.

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Other than declaring it on your tax return, is there any way that the taxman can see you've made a capital gain? I have a relative who claims he never paid it on a second home.

Why do you think the Land Registry is fully computerised and HM Revenue and Customs has direct access to it?

Just wait until the government stops receiving 5.5bn in stamp duty and need to recover some.

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Other than declaring it on your tax return, is there any way that the taxman can see you've made a capital gain? I have a relative who claims he never paid it on a second home.

HMRC may ask what happened to the property when the SA Return no longer includes any Property Income.

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CGT is the difference beteen the price paid for the property and the price it sells for. He will be entitled to make a profit of £8500 per year (2004-2005 figures) and the rest of the profit it taxable (20%-40% depending how much profit).

There is taper relief, so if he has owned the BTL for a log time he will pay less CGT.

Either way, he needs to sell for as much as possible. He may as well make an 40% of £50k.

It is possible to be exempt of CGT. Owning the property for 10 or more years (max taper relief) or moving into the BTL. The condition of the second option is that all profits from the first sale must go towards paying off some/all the mortgage on the BTL. And moving into the BTL can't be the avoid paying CGT. This is a grey area that is being exploited by landlords owning 1 BTL.

I'm doing just that in about 2 years,but the main reason is because my BTL has more living space than my home, and is on the same street. Avoiding CGT is an added bonus.

Seems as though you were right. But do you tell him and save him £1000's or let him find out for himself :D

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His argument was that because he'd mortgaged the property to a total of £150k and then sold it for that value, he had no capital gains tax to pay due to the fact he sold for the same value as his overall mortgage. My argument was that the tax man couldn't care less that he'd remortgaged and now owed an extra £50k. He'd have to pay capital gains on the profit from £100k to £150k, possibly minus some small amounts offset to allow for maintenance and improvement.

I think he really needs to do his homework. You ought to tell him that even if he gave the house away for free he'd be liable for CGT based on the current market value of the property i.e. £200k. :lol:

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Ahem - I'm a tax adviser and I'm afraid none of you really have it quite right.

Moving in should help, as long as :

a. he clearly makes it his 'residence' - one case held that the quality of the occupation on its facts didn't amount to 'residence';

b. he owns the property for less than 3 years. If he owns it for more, only the last 3 years'worth of gain (on a time-apportioned basis) is exempt, plus the period he lives in it if that isn't in the last 3 years: the balance is potentially taxable, though may be covered by a further exemption of up to GBP40,000 (for each of him and his wife if they own it jointly) in relation to the period during which it was let [only applicable to properties which have been a main residence].

For the figures you quote, therefore he'll probably be OK if he moves in, but he needs to take advice on it. Also he potentially exposes some of the gain on his existing main residence, as the exemption won't apply to that for the period in which he lives in the BTL [also subject to all other possible exemptions, like last 3 years, letting etc]. If he didn't make a main residence election within the time limits [which I doubt], he'll best let that out or sell it before he moves in to his BTL or his cunning plan may not work anyway, on grounds a. above.

This is a really complex area - there have been whole books written about it.

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welcome bedsprings.

nice to get some official clarification on some of the tax-breaks.

we've all been having a nice discussion on SIPPS on here.what's your perspective on it.

most of us on here are of the belief that it will not work and the media hype surrounding it is overblown.....how many iquiries have you had about it?

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Guest rigsby II

Other than declaring it on your tax return, is there any way that the taxman can see you've made a capital gain? I have a relative who claims he never paid it on a second home.

What usually happens is that you under declare what the house sold for.

There are many solicitors that will perform this service for you, they are usually located above hal-al shops and you get the difference in price (minus a deduction for services rendered) in an ASDA carrier bag to take home with you.

So I'm told. <_<

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As Bedsprings has stated, living in the BTL so as to make it one's residence is a useful option.

There is no minimum period, and the Court has said it is the "quality of the occupation not the quantity" which matters.

The main advantages of PPR (Principal Private Residence) Relief are :

1. Last 3 years of ownership always exempt from CGT

2. Lettings Relief of £40,000 (max) per owner.

Plus the usual :

1. Taper Relief

2. Indexation (prior to 1998).

3. Annual exemption - £8500 (2005-06) per owner.

If you have more than one residence, you can Nominate which one is to be your Main Residence - there is a 2 year Time Limit.

Inter-spousal transfer (which is exempt from CGT) of a share in the property prior to sale can be useful in obtaining another £8500 of exemption and, possibly, lower tax rates.

The Inland Revenue's Help Sheet IR283 which deals with CGT for private residences has some of the basic information.

It is downloadable from their website.

http://www.hmrc.gov.uk/leaflets/menu.htm

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Oracle - as regards SIPPS, based on my clients' intentions, I don't think many people will be BTL in the current market via a SIPPS. Some may be trying to buy property overseas via a SIPPS.

As regards BTL via a company - the advantage is that you pay a lower tax rate on the net income (if any): the disadvantage is a double tax charge on the capital gain (if any) - ie the company pays tax on the gain and then you pay tax when you extract it from the company, unless you do some planning...

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Oracle - as regards SIPPS, based on my clients' intentions, I don't think many people will be BTL in the current market via a SIPPS. Some may be trying to buy property overseas via a SIPPS.

As regards BTL via a company - the advantage is that you pay a lower tax rate on the net income (if any): the disadvantage is a double tax charge on the capital gain (if any) - ie the company pays tax on the gain and then you pay tax when you extract it from the company, unless you do some planning...

What kind of planning can be done?

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Well if the gain is big enough, you can still buy losses [subject to supply], or enter into a variety of more or less dodgy schemes developed by the larger firms of lawyers and accountants. Otherwise it's difficult. My employer has a lot of property clients - mostly in the commercial rental sector, so they have a lot of bought losses tucked up their sleeves. Some clients deveoped resi. property then decided to keep it - as we're talking smaller gains, it's a lot more difficult to avoid the double charge.

Overseas buyers of UK property often use offshore company structures and they usually don't need to worry about the double tax hit.

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I know someone who generates (for himself) capital losses on trading CFD's which attract capital gains

He then mirrors every CFD trade with an S/B (spreadbet) to generate an identical capital gain - however, the S/B is not subject to CGT - so he offsets the BTL gains against the CFD losses but actually has not made a loss.

It sounds dodgy to me.

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Hehe I put that to him too. I asked what research into the market and his tax position he had done to support his new business venture. His reply was that his BTL wasn't a business but simply an investment for the future.

err wtf? That's ok then :P

So I don't have to pay tax on my investment savings then? GREAT :P

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Londonlandlady - there's a risk if he does enough of this, that HMRC (the Inland Revenue's new abbreviated name) will say that he's trading, so his position nets out even. At worst, CFDs are the sort of thing that based on case law you can't really invest in, only trade in, so even if he only does a few trades he could be caught out. HMRC haven't really caught up with changes in the capital markets but the cases are there to support quite a few attacks.

They could also attack a lot of amateur property developers who've been buying houses to do up and sell 'tax free' using their CGT exemption a la Beeny. If you buy with the aim of making a profit, the main residence exemption doesn't apply - or they could establish the punters are property deveoping therefore trading, therefore no exemption. It's only a matter of time before HMRC wake up!

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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