Need input on a financial decision

Gross or net?

Suely hinges on whether you think the returns from your property (~80,000 value?) will exceed those from depositing / investing 40,000 cash over the next few years.

Sell soon, unless you think you can get more for it by selling later.

Given that the current account is neutral, you need to look at the capital account. If the flat is going to appreciate in value (which nowadays is not an easy prediction to make) at a greater rate than the income you could derive from investing £40k, then it makes sense to keep it.

You've looked at CGT implications, I trust.

I take it your rental income figure is an average, i.e. you actually get more but the figure you gave is after allowing for expenses, voids, etc. In that case, while you have existing tenants paying more, it might be worth leaving well alone, but sell up when the next void starts. Otherwise, i.e. if £400pm is the actual rent, you may wish to make gentle noises encouraging them to leave, since in effect you're already losing money (but it might be balanced by appreciation).

In a flat or decreasing property market (if all the hype is to be believed), then he may be better realising the equity now and pay off his (ever costly increasing) debt. He can then invest the 40K (or whatever he gets after expenses etc), into ISA's and other savings - which will probably in the short to medium term give him fairly good return as interest rate rise (but probably by not quite much more....or until after next May anyway).

Should we also assume that he would be subject to Capital Gains Tax - profit on sale of a second home??

Thanks for the input. The above reflects my own tentative thoughts. However I had not considered the capital gains tax issue you mentioned.

The house in question is my only property. It is divided into two flats. If I sell one of the flats (the one I'm not living in) for

115,000, will I have to pay any capital gains tax?

Thanks

JK

No - I hadn't even considered that. If I sell the other flat for

115,000, will I have to pay any CGT?

BTW, I just relised that after paying off my debts, I'll have more like 25000 left over to invest. I forgot about the cost of work that needs doing to the flat before it can be sold, and the cost of selling it.

Ronald, T400 is the gross rent. Net, it's 350 approx.

Thanks again,

JK

Gross. More like 350 net.

On doing my sums again, I think I'll have more like 25K left over after all debts are paid off. One thing that worries me is that in order to sell the place, I need to give notice to the existing tenant. The time between her moving out and my selling the place, I'll have no rent coming in. I rely on that rent to pay my monthly interest on my debts. If I can't sell the pace for many months, I could come unstuck. I can only just cover my monthy interest payments as it is..

And I ned to get even further into debt to do some work on the flat before I sell it....

JK

Depends. Need more history. How did you come by the house, how much was it worth, how long ago, was it already split? If you split it, was the original whole house your home before you split it, how much did the conversion cost, when was it done, what are the relative sizes of the two flats?

Hi

I bought the house in 1991.

I bought it for 40K. (It was in a bad state of repair).

The conversion cost about 1000 in 1992.

Yes, the original house was my residence prior to the conversion.

The flats are equal in size, approximately.

Thanks

JK

Unless you flog it to the tenant?

Yes, subject to various exemptions and allowances, that in some cases could reduce the bill to £0.

OK, so the starting point is that it was originally worth £20.5k per flat, so if you sold now for £115k the raw gain would be around £85k after costs involved in buying and selling, and indexation allowance. You should be due about 4 years' private residence relief, worth about £26k, and letting relief will be the same, leaving £33k taxable. Taper relief should be worth 25%, and after the annual allowance the amount assessable for tax will be around £16.5k, so expect a bill for between £3600 and £6600 depending on how far you are off being a higher rate taxpayer.

Count yourself lucky. If the whole house had not been your home prior to converting it, there'd be no PRR and no LR, only indexation, taper, and annual. You'd be looking at a tax bill of up to £22k.

Ronald, Thanks a lot. That's very helpful. That's diferent from what a local estate agent's financial chap told me. He said that as long as I sold one of the flats within one year of it's initial lease being drawn up, then there would be no IT bill. At least, I think that's what he said.... But he is more of a mortgage brokr than anything as far as I can gather. However, he said he was talking from recent experience.

But I'm thinking that one doesn't get taxed on the sale of one's first/primary residence. Is that correct? So what about if I sell the flat that I have been living in (my residence), and move into the second flat?

JK

Thanks... 0 would suit me quite well! Please see my reply to Ronald R below.

JK

Thanks; yes I had thought of that, but I really need her out in order to do the renovation and remedial work needed to sell the place. But I'm still chewing that possibility over.

JK

Conversions are a specialist area of which I have no specific knowledge, but nevertheless I strongly suspect he's wrong.

Yes, but to qualify for full relief it needs to have been your PPR for virtually the entire duration of your ownership of it.

Brilliant idea. That should work. At least it will put off the evil hour at which the tax collector comes knocking.

There would still be some CGT to pay when you eventually sell the

2nd flat, because it will then not have been your home for the whole time you owned it.

But what you said (about what that chap told you) could introduce a snag. It boils down to the original house having been only informally divided, and though presumably for council tax purposes it counts as two independent dwellings, for CGT purposes it doesn't (yet). It would mean that you were in effect renting out half your "own" house, so if you sold either half, or indeed both halves at the same time, you would get only half the PR relief. Very roughly the implication would be that instead of paying CGT now when selling the 2nd and none when selling the 1st later on, or if moving, selling the 1st now and paying no CGT now but paying CGT later on sale of the 2nd, the third option would mean you'd pay tax for half the gain on the first sale, now, and half on the second, later. The way the numbers work out in your case, it could mean you pay nothing because halving the gain before your annual allowance is deducted could be enough to push the gain to below the allowance threshold.

OK - I much appreciate the input on that. I have to be careful, because if I *did* end up paying a hefty CGT demand, that, plus the cost of selling the two flats could negate much of the profit I make from selling the place as two flats rather than converting the place back into a single 2-floor dwelling - particularly if property prices fall during the time I'm getting the two flats ready to sell separately. I'll print out what you said for careful reflection.

Thanks again,

JK

Two more points.

1) In case it wasn't clear, don't think that you get let off CGT if you convert back to a single house. Remember, it will not be the case that the whole house has been your main home the whole time. You'll get PR relief for the first year and the last three, but only half for the inbetween years. Much of the lost PRR will be mitigated by letting relief.

2) Don't make minimising tax your primary objective, because maximising overall after-tax return often involves actually paying more tax. Bear that in mind when deciding whether to re-convert back.

Good points - thank you. Just a couple of other questions: You mentioned somewhere in this thread that my income bracket could affect the issue. How so? I thought that CGT was unrelated to income, no? Actually, I think I'm in about the lowest income bracket, since I'm self employed and currently making a loss each year. Would thee be any benefit in starting up as "XYZ Property Developer" (st least until the places are sold) and calling this conversion project a business venture? After, all that's why I'm doing it - to make some money and get myself out of debt..

Thanks again.

JK

There's just one other issue that may be petinent . The cash profit I am left with after the sale of the empty flat, I am thinking of investing as provision for my retirement (I'm over 50 and don't have a pension plan at all). Will that make the profit any less taxable?

Thanks again...

JK