I have some questions for you on private letting of houses. I’m really confused what to do for the best. I have worked really hard and now own 2 properties which currently have tenants in them and which I have lived in for a number of years. I moved out of my last house which currently has a residential mortgage last year as wanted to move areas and now I am currently a tenant myself and renting privately.
I did want to sell my house that has a residential mortgage as I don’t want to get into the dilemma of capital gains tax. My plan was to sell and buy another house for me to live in in my current area so that I no longer rent. However my issue is my income has now dropped being a single mum and it is highly unlikely I would get a mortgage.
I am trying to decide the best thing to do this year about selling. I am currently getting an income from both properties which luckily is helping me pay my rent. Also it means I am still in the property market. I am getting increasing worried that I will lose a large percentage of what I have worked hard for in capital gains tax. I have accepted the fact that I will need to pay some tax on the first property however I only moved out of my last house last year and my plan was always to sell and buy my main home in my new location. However now I am thinking maybe not to worry as it is helping me stay afloat. I could just sell both properties and be mortgage free but I am still in my 40s and am looking at more of a long term picture.
What advice would you give? To sell or not to sell to avoid the tax conundrum!
You have raised some interesting questions here June. Let’s deal with Capital Gains Tax first of all. You are correct when you say that you have to pay CGT when you sell a property that is not your main residence, in other words it is an investment property. CGT will be payable at either 18% or 28% on the gain that you make when selling the property. We all have an allowance each year, an amount of money that we can make before CGT kicks in.
This year it is £11,100, and that is the amount of profit that you could make before you start to pay CGT. The rate that you pay tax will be dependent on your income in the year that you sell. If the profit from the property when added to your income takes you into the higher rate tax bracket then you will pay at 18%, if you are in the higher rate then you will pay tax at 28%.
It is important to note that you only pay tax on any profit you make, so if you have to pay 18% tax then you get to keep the other 82% of your profit, and that’s really not a bad deal. There are also expenses that can be offset against your profit before your final tax bill is calculated.
There are also rules in force that say that a house you currently rent but have lived in recently can be exempt from CGT. The rules are complex and I don’t know enough about your circumstances to give detailed advice at this stage but if you want to write to me again with more details of the properties and dates then I can expand on this.
You say that you could sell both properties and be mortgage free but you would then have to decide what to do with the equity you received and think about whether you are getting a better return being in property than you could get if you did something else with the money. You are right to be thinking long-term with your investment properties and there is no harm in having mortgage son these properties since someone else is effectively paying them for you at the moment so it is free money, and you also have the possibility of an increase in capital value in the long term.
I would stress that I don’t know enough about your general circumstances at this stage to give you specific advice, but from what you have said so far I wouldn’t be in a great rush to sell, unless you desperately need the money for something else.