Beware of falling into a tax trap !

With the housing market looking as though its peaked (er … yet again, and for the umpteenth time in the last 2 years), some landlords are now looking to sell some of their portfolio.  Whilst this may seem like a great no-risk way to release the profits that they made over the last couple of years, it's a step that needs to be taken with great care and understanding of any tax implications that may exist.

It's a trap that's easy to fall into, you buy at £100k, and the property value goes up to £200k, and naturally you re-mortgage to help fund other buy-to-let properties, as after all, its "free money" right ?  You're tenants are paying the increase in mortgage payments and you have bought more property and taken advantage of this "free money".  The downside of this is now that you come to sell the property, the money that turned out to be free, may have landed you in a bit of a trap.

Let me give you an example, a friend of mine bought a property for £120k, the value increased to

£180k and he drew down some of the funds to buy more buy to let property.  There's nothing wrong with doing this and this is a common way that investors add to their property portfolio.

So, he now wants to sell this property, as after he re-mortgaged the apartment, the cost of his mortgage payments, service charge and the management charge, he was barely breaking even.  Add to that mix an increase in interest rates and the property was starting to lose its appeal.

So when he said that he was going to sell up, I asked him how much it was valued at, what he paid for it, and how much he owed on the mortgage.  The property was bought for £120k, the mortgage outstanding now was £153k and it valued at £180k.

He was under the impression that as he owed just £153k, he would only end up paying capital gains of £27k (The difference between £180k and £153k).  Then of course he had his capital gains allowance of £8,100 and therefore would only pay his tax on the £18,900.
Page 2--Beware the tax trap (cont.)

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