Trapped by high gearing and CGT

Hello, I meant you can carry over the losses to be used against any rental income you have in the future. Unless you decide to sell all your rental properties at the same time, when you will not have any rental income to set against. Good luck!

OPTION 1

Are you planning or thinking about moving abroad?

If you move to another country which does not have CGT, ie somewhere like New Zealand, sell the properties in the tax year after you've moved. You are then taxed under New Zealand laws and therefore not liable to any CGT.
If you return to the UK within 5 years you will be taxed a portion of CGT, after 5 years nothing.
Check out these rules thoroughly beforehand though - rules are changing all the time!

OPTION 2

Seems crazy but - Buy another property or two in an area that will make money to offset your losses of £6k pa. Therefore taking away the need to sell urgently.

Then hold them all for a much longer time until you have the capital growth in all of them to get out when you want & be able to pay the tax.

Good Luck
Yvonne

Sorry, forgot to mention, CGT maximum rate is not the same as your income tax rate.
The maximum is 28%.

So your £125,000 gain, less any buying and selling costs, solicitors, agents fees, etc, that should take it down to £120k, less your CGT allowance of £11k, takes it down to £109k taxable at 28%.
Tax payable is £30.5k.
£240k, less your mortgage £195k, less your tax £30.5k, should be left with around£14.5k .

Yvonne

Reply to the comment left by "Yvonne B." at "17/06/2014 - 12:14":

Thank you Yvonne, I have no plans to leave the Country.

To all - thank you for all your advice, especially for challenging my understanding of CGT, 28% is the rate I would pay. It is strange how ones mindset changes when the feeling of being trapped no longer exists. I feel like the gates of a prison have been left open and I now have a a fear of escaping! I have been playing with the landlords calculator on this website and that has made me realise how sloppy I have been in terms of managing costs and rental voids. I have plugged in a few numbers based on figures from ARLA (14 day void periods and average tenancy length of 21 months) and I could do a lot better. I have also used the Property Research Tool to look up comparable properties in my area and there is good scope to increase rents. The Equity Finance looks interesting and so does the insurance offer I've now got. I'm seriously considering moving the full management over to the agent recommended by Mark too.

On paper, I should be able to make a reasonable profit moving forwards and should still break-even at a 5% base rate which was what rates were back in 2008.

The question I have to ask myself now is whether I should cut and run now or whether I should speculate further. I am now far better educated and the prospects of tax free income, by using up my rolled up rental losses, are quite mouth watering.

I will let you know what I decide in a few weeks time but I am leaning towards restructuring in accordance with the suggestions offered by Mark. If that is what I do eventually decide I hope to be in a position to share a success story in a few years time.

Reply to the comment left by "Anon " at "17/06/2014 - 12:31":

Hi Anon,

Pleased your position is no longer so bleak.

Another consideration is if you (and partner?) will always be higher rate taxpayers.

For e.g could you retire a year before any occupational pension kicks in and sell in that year to utilise all your nil rate band and 18% band (and that of your partner?).

Of course, there could be even more of a gain by then but that would be a good thing!

If you have a tracker at 2% (or a 2% fix that will surely end sometime) how on earth are you loosing money! Is it silly service charges or bad tenants?

If you cannot fix the reason for the losses, unless you are earning a fortune in your day job, I think you NEED to sell these and take the loses in a controlled fashion.

The alternative is rates go to say 2.5%, your 6K a year loss turns into say 9K, maybe your home mortgage goes up a bit too, and you get into difficulties paying the mortgage, or at least you cushion against voids is reduced.

The nightmare then is the rental properties are 'managed' for you (google LPA), you can argue mismanagement but they will not mind a void in a property they aim to dispose of, while you get to cover the council tax!

When they dispose of the properties, taking their fees off the top, leaving you with a much smaller gain, possibly not enough to cover the CGT, on multiple properties in the same tax year, so yet further increasing the CGT liability.

It would be good if the CGT could come out of the proceeds before the mortgage company take what they can, but I don't think they can, on the first disposal at least.

So you could end up owing money to the mortgage companies and the tax man, could you cover that and still keep your own house?

Sorry for the downer, maybe it has made you feel much worse, but while contemplating whether to take a 20K say hit on CGT you need to know what you are risking.

Reply to the comment left by "Chris Amis" at "19/06/2014 - 10:28":

Dear Chris

Thankfully, affordability isn't the issue here.

I purchased the properties as an investment. In the boom years the capital appreciation more than compensated for losses which occurred due to lack of knowledge. Rising property values have not occurred since I refinanced and expended my portfolio in 2008. This has exposed weaknesses in my investment strategy. Just because I have been able to afford to subsidise my portfolio does not mean that it makes sense to do so.

The exercise I am currently undertaking is from a self critical perspective of my investments. If I was writing my own school report on my performance it would read "could do better", so with this in mind I have decisions to make.

I am not as trapped as I first thought and it is clear from the advice I have received and my subsequent research that I have not managed costs, income streams and rental voids as efficiently as I could have done. It is against the backdrop of this analysis and fresh information that I am now re-evaluating my strategy. Whatever decisions I make from this point onwards will be based on fresh information and experience. I am not the kind of person to continue to do the same thing and to hope for different results. Whatever I decide to do will involve change.

Your accountant is right in that if you can show you have lived in the property you can qualify for ppr and that will reduce the cgt.

To increase the income on the 4 bed ask more than one agent as your current one may not want you to rent it that way especially if they fear losing business.

I rent a house to sharers that have just left university and it works very well.I have been doing this for 14 years with very few problems.The housing benefit tenants are best avoided.

If I were in your shoes I would not want to pay cgt and if you don't get ppr relief the only other way to avoid it is to keep the property until you die as cgt does not apply on death.

Your accountant is right in that if you can show you have lived in the property you can qualify for ppr and that will reduce the cgt.

To increase the income on the 4 bed ask more than one agent as your current one may not want you to rent it that way especially if they fear losing business.

I rent a house to sharers that have just left university and it works very well.I have been doing this for 14 years with very few problems.The housing benefit tenants are best avoided.

If I were in your shoes I would not want to pay cgt and if you don't get ppr relief the only other way to avoid it is to keep the property until you die as cgt does not apply on death.

Reply to the comment left by "Bill Morgan" at "21/06/2014 - 09:50":

You can get sharers for your 4 bed using gumtree and spare room com.

Take a look online and see what you can get for one room.

Use your initiative and don't trust agents unless they specialise in sharers.

Although a loss of 6k a year is annoying and stressful it can be reversed quite easily especially if you buy high yielding properties.I bought a property yesterday that will make 21k per year.

High yielding one bed flats are easy to manage and let.