UK finance/debt/tax problem - advice much appreciated!?

Question

My Flat, London, Zone 2 Value c £200k, mortgage c 23k. Too small but convenient location.
Late Mother's flat, London, Zone 5 Value c £150k No mortgage. Dated.
3 x Buy to let:-
1. 1 bed Flat - London, Zone 2 Value c £200k, mortgage c 33k Rental income c £800 pcm

2. 3 bed Flat - London, Zone 2 Value c £250k, mortgage c 43k Rental income c £750 pcm (under market rent - damp) Work needed.
3. 2 bed flat - London, zone 3, near Olympic site. Value c £230k, mortgage c 33k Rental income c £800 pcm
All owned over 10 years.
No real savings
Debts:£22k Inland Revenue (3 tax years plus penalties/interest)
£7.5k earlier defaulted loan - at County Court stage
Credit cards on min payment - c £8k
Issues:
1. Need to deal with debts asap
2. Concern about CGT if selling BtL / Mother's flats
3. Concern at 40% Income tax on BTL profits
4. My flat too small - other local BTL flat bigger but unsuitable environment
5. Can't decide way forward with Mother's flat
6. Reluctant to sell BTL flat

Answer 1

This is very complicated and a lot more information is needed to advise on the situation. However, some points about the issues raised which may anable you to take it further.

1. It seems that you are going to have to sell something to clear the debts, particularly the Revenue. They will not accept an extended repayment plan if you have assets available.

2. I don't think your decision should be driven by tax considerations. I'm not suggesting you forget about CGT but just treat it as another cost (like legal fees) and look at the commercial viability of any proposed transaction as a whole.

3. Why is this a concern? Do you mean that you have not been paying tax on these rents (possible in view of the arrears) and that you do not think you can afford to in the future? Interpreting your comment literally would imply that you have a gross income of at least £67,000 a year of which you are only paying tax on £39,000 and that you are still overspending as you are running up credit card debt. Please tell me this is not the case.

4. From a purely financial point of view I think you should sell your present residence and but something larger and more suitable for you. Buy something that you will be able to rent out in the future. After you have lived there a couple of years you can move again but retain this property. This will give you extra reliefs for CGT purposes when you do finally sell it.
If you repeat this procedure in the future the impact of CGT wil be much lower.

5. You are not getting any income from this. How long have you owned it? Don't forget your cost price is taken at probate value if you inherited this from your mother so the gain may not be all that much. Of course, sentimental reasons may complicate any decision.

6. If you do not sell your mother's flat then you may have to sell one of the BTL places. Is the value for no. 2 what you would get for it now or after the work is completed? If it is worth £250k in its present state then it is not paying it's way. To see what I mean lets look at some figures.

Sell it for £250,000.

If it cost £50,000 then you have a gain of £200,000, reduced to £120,000 by taper relief. Even assuming 40% tax this is only £48,000.

So pay the tax and mortgage to leave about £159,000.

Clear the debts (£38,000) to leave £111,000. This could bring you in £500 per month from a reasonable bank deposit. How much do you get at the moment after paying the mortgage?

It would also be available as a deposit for another BTL but aren't you a bit over-exposed to the property market now?

Hope this helps to get you thinking.

Answer 2

DEBTS - It might be difficult due to your debt history but with all these assets you should be able to raise some extra cash if you use the properties as security, a mortgage would probably be the cheapest option.
CGT - Increasing mortgage would avoid the CGT problem now. Remember that at some stage, unless its your home, the IR will get you one way or another either with CGT when you do sell or IHT (inheritance) if you die first. However if you can't increase mortgage then your only option is to sell your house, it sounds like you want to do this anyway as its too small but none of the other current properties would be a suitable replacement, besides you are getting a good return on these investments so you should hang on to these. INCOME TAX - Wherever possible you should have your mortgage debts against the business assets as you can claim interest paid as a deduction against the income, thus reducing the profit that is chargeable to income tax. Therefore you should move your mortgage on your home to one of the businesses.

SUMMARY (based on the limited info I have)
If I was you I would sell your flat, repay the debts as quickly as possible and move into your mothers flat, just for a while. That way your house is expempt from CGT assuming you have always lived in it, whilst you have owned it. The gain on your mothers flat will be calculated gain x period occupied/period owned. I am hoping you have only just inherited this so living in it for a short time only will make a good % so you can sell it, paying minimal CGT tax as you will have occupied it for quite alot of the time you owned it. You will then have the proceeds of both properties, less the 23k mortgage and 37.5 debts to buy the bigger property you want, whilst keeping the BTL.

Remember if you do re-organise or re-mortgage, make sure they are on the BTL to get the interest as an income tax deduction.

It would be worth paying an accountant and getting some proper tax planning for the future so you can minise tax by plan the future disposal of assets in a timely way so as to take full advantage of annual allowances, business taper reliefs (these increase annualy so you want to dispose of in the start of a new year, not the end of the last one to get an extra year) and so on. I would charge you about £50 per hour for this kind of advise, but would need all the facts and figures, my answer is based on very limited information that you have provided.

Answer 3

The mortgages on those are tiny relative to their values. You could remortgage one of them up enough to get the cash to pay off those debts thus avoiding a CGT problem for now.

In terms of tax planning on the rest (and moving house) - you should pay an accountant!

Answer 4

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Answer 5

See an accountant.