Some landlords are finding themselves in a borrowing trap with growing tax bills and are being forced to sell properties due to financial pressure from banks and other lending institutions ...
In a simple example, a property investor could assume that an increase in property value will go on forever. At the time of purchase, the lending institutions thought so too and now the investor is in negative equity.
Assuming a property portfolio of £1 million with gross rent of £50,000 per year, borrowing is £1.1 million and the interest on these interest-only loans is £44,000 a year once the low fixed rate term expires.
Whilst the investor's actual profit is £6,000 before expenses, his deemed profit is £50,000 which is the gross rents before interest. After basic rate tax relief, the tax due is around £11,000 which is larger than his actual profit.
So, the only way forward for the investor would be to sell property from their portfolio, but the Osborne Tax makes it quite painful. Especially if you are in negative equity, the Capital Gains Tax bill can be greater than the money made on the sale of the property.
Unless you have spare cash to hand, this borrowing trap leaves you stuck in an impossible situation. Circumstances could mean you're being forced to sell, but because of the tax, you may find it financially impossible to sell it.
I'd suggest that you should do an analysis to figure out which of your properties will produce the lowest Capital Gains Tax, which are probably your most recent purchases. Enough equity could solve the problem of not having enough money to cover your tax bill.
Another option would be to refinance part or all of your portfolio so you can pay off some or all of the loan on the property or properties you're selling. There could also be an option to convert one or more properties from a private rental into a furnished holiday let and gain tax relief that way. These are eligible for Entrepreneurs' Relief if it has been that way for two or more years. It could reduce your Capital Gains Tax from 28% to 10% which could be a considerable saving.
And finally, have you considered incorporating your entire portfolio into a limited company then claiming Incorporation Relief from Capital Gains Tax? This could be beneficial, but not something you want to do without advice.
If so, there are ways to mitigate the tax effects, and I'd strongly recommend you speak to your tax advisor for professional property advice before making any decisions.
If you'd like to find out more about anything I've written here, do call me on 01908 774323 or leave a comment below and let's see how I can help you.