Q My husband and I are renting our home, but we own a flat that we let to tenants. We have new babies (yes twins) on the way so we are looking to buy our home and extend. We think we can just about scrape together enough to purchase twith a big mortgage, gifts from family, every penny of our savings and by remortgaging the flat. If we sold the flat, we’d have enough to buy and do a bit of work. We could manage without the work for a couple of years while the babies are small but, within a few years, our eldest (the only boy) will be likely to want his own room so we’d need to extend.
Do we sell the flat straight away or hang on to it in case it continues to increase in value? We bought it 10 years ago for £210,000 and we are estimating its current value around £300,000. (There is mortgage of £165,000 on it.) Do we keep it and remortgage to pull out a smaller amount now with the thought that it will continue to increase in value and, in five to 10 years, maybe get more out of it?
It is in a good rental location in a commuter city (Guildford), so we’ve not had much trouble getting tenants, although they usually only stay a year so we do have annual costs to get new tenants. The rent is more than double the current mortgage payments.
I am concerned that, as owners of two properties, we will become subject to additional taxes or penalties and that, if we sell it in the future, we’ll have to pay a large chunk of capital gains tax. If we sell it while it is our only property would we be exempt from this? BS
A You don’t need to be concerned that, if you were to own two properties, you would be subject to extra taxes or penalties as capital gains tax (CGT) doesn’t work like that. The fact that you own only one property also makes no difference to any potential tax bill. Unless the flat was your home at some point, if you make a gain when you sell it – which you will if it sells for more than it cost you – there will be a tax bill if your share of the gain is more than the annual CGT exempt amount of £11,000 each (in the 2014-15 tax year).
If you and/or your husband did ever use the flat as your home, you may be eligible to apply for tax relief – in the form of private residence relief that makes part of the gain tax free. You may also qualify for “lettings relief” which also reduces the size of gain on which you pay tax. Lettings relief is only available if the let property was your home at some point. You can’t claim it on a property that was let for the whole time you owned it.
The same tax rules apply if you decide to sell the flat in a few years except that if the gain increases – which it will if house prices go up – so will the eventual tax bill.
As to whether you should sell the flat or hang on to it and stretch yourselves to the limits to buy yourself a home, it’s hard to say. Assuming the flat is worth £300,000, the most by which you can probably increase the mortgage is £75,000 (assuming you have a buy-to-let mortgage with a maximum loan of 80% of the value of the property). You need to decide whether, when combined with your savings, your family’s gifts and a residential mortgage, this is enough to buy the home you need.
Muddled about mortgages? Concerned about conveyancing? Email your homebuying and borrowing worries to Virginia Wallis at virginia.wallis.freelance@theguardian.com
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