Now I hope that you can see what's coming.  He was aghast when I had to mention the fact that it was irrelevant, the amount that he owed on the property - the important point was what he bought it for, and what he sold it for.  The fact that he bothered to take an additional loan on the property doesn't matter to the Inland Revenue.

This one small error makes a huge difference on the amount of tax he will now have to pay.  Lets review it :

He bought the property at £120k, and now wants to sell at £180k.  Therefore the profit is £60k and it is this amount that he will be taxed on, less the £8,100 capital gains allowance of course, which leaves a profit of £48,900.  As he is a 40% tax payer, his tax bill on that amount is £19,560.  That is what he will need to pay the inland revenue (remember that this figure does not included any estate agency fees, nor any solicitor fees)

So, the bottom line for him here, is that if he decided to sell his property his tax bill would be £19,560.  Which would only leave £29,340 in his pocket.  Is it worth it ?  Well he just paid nearly £20k in tax - what do you think - would you do it ?

Maybe he should just wait and let the property increase in value some more, would that be a

good way forward?  One of the problems with this is that even if the property increased by another £50k, well so what - he cant access that money.  But surely he could re-mortgage the property - well maybe, but most lenders want an extra 30% over and above the mortgage rate as rental income in order for the figures to stack up.  If he is already at the top of his rental income, he simply will not be able to re-mortgage as the lenders will not let him, especially if the interest rate keeps on rising. There are one or two companies that allow up to 125% of the mortgage payments, and they have a keen interest rate, but they tend to tie you in after the discount period with high redemption penalties.  One of the major keys to successful property investing is the flexibility to do what you want.

I think the friend of mine already broke the rule of flexibility by re-mortgaging in the first place, and getting tied into a property that he may have to keep indefinitely now.  Maybe a great way to do this is to have some properties that you re-mortgage, and some that you don't touch, that way, if you need to sell for whatever reason, you have a little flexibility on which ones to sell and which ones to keep.

That this the way in which I invest--some are mortgaged to the hilt, while others have not been touched, and these have grown in value, so if I need access to some funds, then I can do it, whilst maintaining some flexibility with my tax position.

As always, you should check with your accountant before jumping ahead and making a decision that may be costly.

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