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stop_the_craziness

Capital Gains Tax and MEWing

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This is a super-basic question, but I got myself involved in an argument with smug BTL family members yesterday and now I’ve started to doubt myself.

In brief, they have had a BTL since the very, very early days and paid about £50,000 for it, with a few thousand deposit and the rest on mortgage.  But they’ve been seriously MEWing it in the past decade and the mortgage on it is now about £150,000.  It’s probably  worth about £210,000 at today’s prices and now they are thinking of selling.

We got on to the subject of capital gains.  Their calculation was that because they would see about £60,000 profit (£210,000 minus the current £150,000 mortgage to pay back) they would pay capital gains on that £60,000.  But I said they would pay it on about £160,000 because that’s the difference between what they bought it for and what they (could) sell it for.

I’m was sure I was right because the gov.uk website define it like this, which seems totally straightforward

 “Your gain is usually the difference between what you paid for your property the amount you got when you sold (or disposed) of it.”

But my relatives told me I was being “utterly ridiculous” because “no one could afford that”

Tell me I’m not going mad! 

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I am sure others more expert than me will comment further and more fully but I am pretty sure you are not going mad and your house hoarding relatives are in for a nasty shock.  CGT is calculated by reference to appreciation in capital value of the asset, it's nonsense to suggest that you can mitigate CGT exposure by borrowing against the asset and going on cruises etc.

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Capital gain = £210,000 minus £50,000 = £160,000. You are right.

Strictly speaking each person sharing in the gain would get an annual exemption of just over £11,000. Say it is jointly owned by two people - the taxable gain would be around £138,000. But they are still talking nonsense.

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2 hours ago, stop_the_craziness said:

 “Your gain is usually the difference between what you paid for your property the amount you got when you sold (or disposed) of it.”

But my relatives told me I was being “utterly ridiculous” because “no one could afford that”

Tell me I’m not going mad! 

You are not going mad.

If your relative was right then nobody would pay any CGT on residential property. You'd simply leverage up before you sold in order to avoid the CGT.

Edited by Bland Unsight

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I bet they've been claiming tax relief on the whole of the interest paid on the mortgage too (they can only claim this on the original amount of the mortgage unless the MEWing has been used to develop the BTL business e.g. buying more houses or improving current stock). HMRC are going to have a field day with them.

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2 minutes ago, stuckin2up2down said:

If someone keeps MEWing and never sells it do they ever get CGT?

Nope. The disposal (i.e. the sale) is the chargeable event. Remortgaging is not a chargeable event.

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Makes you almost want to give up trying to help people. On another message board I'm on, somebody was asking what to do with a lump sum.  Pay off mortgage or invest, this is one of the replies.

Quote

Money is so cheap and will surely stay so for years. Get a BTL mortgage and you should get c.10% yield on your invested cash (deposit + stamp duty + refurb + fees) after paying your mortgage interest and letting agent fee.

Plus capital growth . . .

Maybe they'll be right, maybe not.  But the tunnel vision of it, with no understanding of the risks is stuns me. Oh it'll be alright ...

 

 

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34 minutes ago, This time said:

I bet they've been claiming tax relief on the whole of the interest paid on the mortgage too (they can only claim this on the original amount of the mortgage unless the MEWing has been used to develop the BTL business e.g. buying more houses or improving current stock). HMRC are going to have a field day with them.

That does seem likely.

AIUI withdrawing the original deposit amount would have been okay, it's the interest on the £100k over that which, if withdrawn for personal income and not to maintain or expand the portfolio, would not have been an allowable deduction when calculating their taxable profits.

They could find - if they have been borrowing money against the BTL for their private use - that they not only have a much larger CGT bill than they expect, but that they also owe a sizeable amount of income tax on their past rental income, if they have been wrongly claiming all of their finance costs as a deductible expense.

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HMRC, BIM45700 - Specific deductions - interest: Withdrawal of capital from a business

A proprietor of a business may withdraw the profits of the business and the capital they have introduced to the business, even though substitute funding then has to be provided by interest bearing loans. The interest payable on the loans is an allowable deduction. This is on the basis that the purpose of the additional borrowing is to provide working capital for the business. There will, though, be an interest restriction if the proprietor’s capital account becomes overdrawn, see BIM45705 onwards.

Quote

HMRC, BIM45705 - Specific deductions - interest: Overdrawn capital account

An overdrawn capital account shown in the balance sheet is no more than an indication that a loan or overdraft is being used to fund private drawings. You must be able to demonstrate that it is private drawings, which have caused the account to become overdrawn, and that the overdrawn capital account has been funded by bank borrowings. You must look carefully at all of the components of the balance sheet to judge how the proprietor’s drawings have been funded.

 

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I remember fondly when in March 2106 the government cut GCT rates to 10% and 20% for basic rate and higher rate tax payers respectively but added an 8% surcharge on residential property capital gains to leave those rates unaltered at 18% and 28%. Big Phil Hammond wants that CGT (link).

Edited by Bland Unsight

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4 hours ago, stop_the_craziness said:

This is a super-basic question, but I got myself involved in an argument with smug BTL family members yesterday and now I’ve started to doubt myself.

In brief, they have had a BTL since the very, very early days and paid about £50,000 for it, with a few thousand deposit and the rest on mortgage.  But they’ve been seriously MEWing it in the past decade and the mortgage on it is now about £150,000.  It’s probably  worth about £210,000 at today’s prices and now they are thinking of selling.

We got on to the subject of capital gains.  Their calculation was that because they would see about £60,000 profit (£210,000 minus the current £150,000 mortgage to pay back) they would pay capital gains on that £60,000.  But I said they would pay it on about £160,000 because that’s the difference between what they bought it for and what they (could) sell it for.

I’m was sure I was right because the gov.uk website define it like this, which seems totally straightforward

 “Your gain is usually the difference between what you paid for your property the amount you got when you sold (or disposed) of it.”

But my relatives told me I was being “utterly ridiculous” because “no one could afford that”

Tell me I’m not going mad! 

If you really want to mess with their heads point out that if prices go down by 25% then the property might only go for £150k. The sale proceeds pay off the mortgage but the gain remains though now it's only £100k. Spilt two ways a £50k gain falls on each of them. Knock off the £11,300 annual exempt amount leaves a chargeable gain of about £40k. If either of them earn enough to take them out of the basic rate tax bracket there's £11,000 of CGT to pay on that individual's £40k gain. Even a basic rate tax payer needs to find about £7,000.

Tell them to hurry up and sell whilst there's enough equity to cover the CGT bill.

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5 hours ago, stop_the_craziness said:

But my relatives told me I was being “utterly ridiculous” because “no one could afford that”

Tell me I’m not going mad! 

Regardles of whether they are right or wrong (and they are clearly wrong in the face of the facts you provided), their reasoning reeks of idiocy. They should head to the neares Ferrari dealer, sing a deal and then refuse to pay on the same basis.

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It's beginning to look like a perfect storm;

Stamp Duty changes

Capital Gains Tax changes

Section 24 of the new Finance Act

Basel III

and the Housing and Planning Act 2016

Each one on its own is bad news for the over indebted BTL landlord. As each one has come on line their position looks more and more tenuous and if they have to cash out it will cause blind panic amongst the less indebted as they are sucked into a falling market.

Still I am sure it will be fine as long as the market keeps on with its stellar rises ...... ooh!

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3 minutes ago, Switch625 said:

Still I am sure it will be fine as long as the market keeps on with its stellar rises ...... ooh!

Truth be told, I'm not really interested in a house price crash for any reason except the prospect of a 'The Sad Faces of Wronged Mail Readers' story about somebody who is forced to sell their BTL by the lender and once the mortgage is paid doesn't have the equity to pay the CGT.

On the subject of your "perfect storm" list, don't forget falling net inward migration due to Brexit uncertainty and the weakening pound, the demographic turn as the boomers retire and seek to downsize. And don't forget the interest-only timebomb and the prospect of forced sellers from that...

59a9ca98c9824_fcaexperianiograph.jpg.14fa5e9bd5d873b1c3fab311e899bf92.jpg

Source

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4 minutes ago, Switch625 said:

True enough and best of all,

None of this requires base rate to shift one jot!

But if base rates do go up we are looking at armageddon in the housing market

Mortgage lender SVRs still solidly in the 4.25%-4.5% range, as they have been since 2012. If house prices move down then for some borrowers mortgage rates will move up as they lose access to cheap mortgage finance when fixed rate deals expire. The whole thing is precarious.

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  • 297 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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