One of the great things about property is that over time the value goes up. When it does you get to remortgage. This is great! Raising capital against an existing BTL creates a cash pile to use elsewhere.
One of the terrible things about property is that over time the value goes down. Sometimes. If you have had a round of remortgaging in the mix this causes issues!
This is a real life situation faced by the client of a solicitor pal we discussed last week.
Chap bought a house for £20,000 many years ago. When things were great, and the property was worth £60,000 her remortgaged up to £45,000! Flying! Now though the house is busy selling for £40,000. He has a £5,000 shortfall to give to the bank. They’ve been kind enough to let him spread the shortfall. So far so good.
What he hadn’t realised though is he also has a capital gains tax bill. How’s that you say? Well because he is selling it for more than he paid for it. £40,000 less £20,000 (ignoring exemptions) gives a CGT liability of £4,800. So on top of £5,000 of the bank he needs to find £4,800 for HMRC.
Oh, he has five of these. And has to sell them for reasons we won’t go in to.
So you might ask how he can be facing a CGT bill despite not walking away with any cash. It’s a good question. The answer is that on the remortgage he took his profit and spent it! He took at least £30,000 out of the property and used it. Had he taken advice at the time his advisor would have warned him to keep some of the money aside.
A simple way to avoid tax on money you don’t receive is to never remortgage above the original cost of the property. Sure you will have less cash but you will completely void this issue.
So no you’re asking what’s going to happen when every single person out there doing BRRR and getting all of their money out of the deal is going to do!? Excellent question! Especially when the refurb on day one was probably a rental expense rather than a capital expense meaning even though they only got their cash out they already have a tax bill if they were to sell…