Tax advice on soon to be LTB which is my home

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    Tax advice on soon to be LTB which is my home

    Hi all

    I am trying to buy another property with my partner to move in and be our main residence and have decided to rent mine with a LTB mortgage to raise the £ needed.

    It is more attatchment to my home which I have owned for 11 years and lived in for most of that time after a complete renovation. The plan then is to, probably, sell it soonish, flexible on this.

    I then read about CGT if you sell a rental property, with special rules if you have lived in it, but cannot seem to find the anything about these specials rules!

    When I say flexible, it could just be for a 6 month rental then sell, or more, depeding how best to go with this tax thing!

    Many thanks for any help


    #2
    The gain is calculated over the period during which you own the property, and then apportioned between the time you lived in it (plus 9 months - assuming you sell after this April) which is not taxable and the time you let it, which is.

    If you buy another property while owning this one, you will pay an additional amount of SDLT - which you can reclaim if you sell within a short period.

    Taking out a mortgage for 6 months is not usually a great idea, the mortgage fees tend to make that quite expensive.
    When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
    Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

    Comment


      #3
      Ok great thanks.

      I actually called the tax office today and luckily got a really helpful woman.

      She pretty much said that and if you went into the time tax was to be paid it was done in fractions or something.

      Yes I agree, this is me covering all my options. I suppose there is a way to calculate where the amount of tax outweighs the early repayment charge and vice versa?

      If I disregard anything I've spent on my home I think the gain would be about £250k as a rough idea, if anyone could explain or help me work this out for tax I would be liable for?

      Great site by the way!

      Comment


        #4
        Any help on this please?

        Is a way to calculate where the amount of tax outweighs the early repayment charge and vice versa?

        Comment


          #5
          I may have worked this out actually, or be completely wrong!

          Lets say the house is worth £250k more now than when I bought it.

          Lived in it 11 years, I then rent it out for 2 years.

          £250k x 11 divide by 2 (ignore the nine months to keep simple) is 45k ish?

          Using tax scouts CGT calculator is says £6500.00?

          Is this roughly correct?

          The ERC on the mortgage is about 12k for the first year!

          Many thanks for any guidance

          Comment


            #6
            Assuming when you sell it it's worth £250,000 (it doesn't matter what it's worth now)...

            It's (£250,000 /13) times 2, not divide.
            But you get the extra 9 months, so it's basically times 1.25

            Which is £24000 of taxable gain.
            Less your personal allowance of £12000 leaving a gain of £12000.
            So tax would be about 2160 or 3360 depending on whether you're a standard rate or higher rate tax payer.
            When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
            Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

            Comment


              #7
              That is really help, I really appreicate that.

              Does the 9 months start from the day the mortgage changes to BTL or from the day the tenancy starts?

              I have worked this using you figures and tax scouts CGT and rental income calculators.

              As the ERC on the mortgage is 12k after one year and about 5k after five years it seems including the CGT needed to pay and how much rental income would accumulate, it would be sensible to sell in year 3, 4 or 5 really?

              Comment


                #8
                The 9 months is added on to the period when the property was let.
                That period begins on the first day of the first tenancy.

                The mortgage doesn't have any effect on CGT.
                When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                Comment


                  #9
                  Thank you.

                  In a nutshell, am I right in thinking, the longer I let this, the more CGT I would pay which would eventually outweigh any rental income?

                  Comment


                    #10
                    That sounds unlikely - it's possible but it would mean that anyone letting properties would never make any money!

                    Essentially every month you let the property, the taxable proportion of the overall gain would increase.
                    Taking the worst case scenario (because it's simplest), imagine that you had no relief at all - so you had never lived in the property and ignore any CGT personal allowance.

                    Let's imagine a perfect world in which property values always go up at the same rate as yours has historically.
                    Every month you would incur a CGT liability of 18% or 28% of the increase in that month's value.

                    You've lived there 11 years and, so far, it's gone up £250,000 in value - that's £1900 per month - which is a monthly tax liability of £532.00 per month if you're a higher rate (28%) tax payer.

                    So provided the monthly profit on the rental after income tax is more than that, you'd never outweigh the rental income.

                    And that ignores the 11 years (plus 9 months) Private Residential Relief you actually have "banked", so the reality is that it would be much less than that.
                    It wouldn't actually get to that figure until you'd let for 11 years unless the property price started rising at a faster rate.

                    Your biggest risk is that the relief is cancelled in a budget - but that would cause havoc and I don't think it's too likely.
                    You might lose the extra 9 months, which is more likely (and I haven't included that in my simple example).
                    When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                    Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                    Comment


                      #11
                      Thank you for the detailed answer 😊

                      Here is our situation:

                      If we go for and move into this new property, keeping it simple I worked out rental on existing home changed to LTB (minus mortgage payments and income tax) would be 35k ‘in the bank’ in five years. If I then decided to sell the property at that time, if you factor in the CGT of £15k (round figures and higher rate tax) as well as the 24k stamp duty I have to pay upfront on the new property and 2k legal fees, I am actually 6k worse off!

                      Does this mean, I would need to keep renting it out and sell much further along the years to have gained enough income to balance out the stamp duty/CGT, or am I better just trying to sell my home now and use the £ towards the new property mortgage?

                      Hopefully explained that as simple as I possible!

                      Comment


                        #12
                        If you have no plans to be a landlord and a five year start to finish time frame, it's probably not the best use of your time and money.
                        If you'd always wanted to do it or had a longer time frame, the answer might be different.

                        The extra SDLT on your new home is the deal breaker for me - your time frame doesn't allow it to be spread over long enough to make it work from a purely money point of view.

                        It's very hard to find a better investment than your own home (and residential mortgages are cheaper than BTL).

                        I'm a landlord, not a financial advisor and can't vouch for the quality of my opinion (and I obviously can't give actual advice).
                        When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                        Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                        Comment


                          #13
                          Thank you!

                          I realised I missed something out, I do have another property which is rented out, owned for 21 years, rented out for 10, didn't live in prior to that as was complete renovation! That is completely separate to any fiances involved here. Although does answer the question that, yes, I am already a landlord.

                          I didn't ever think of a LTB on my home until my financial chap suggested this options. Then the CGT came into it!

                          What would you call a long enough time frame to counter balance the SDLT out?

                          Comment


                            #14
                            If you already own another property, you should probably factor out the SDLT and legal fees, because you're going to have to pay them either way.

                            So your five year picture looks £20k positive to me.
                            When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                            Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                            Comment


                              #15
                              Really?! I thought as the other BTL is clearly not my main residence and I am selling my actual main residence outright the 24k SDLT would not apply?

                              Comment

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