Eventual CGT on PPR converted to Investment property

[noobie99]

Folks,

I've read the revenue dox and the FAQ here but still need some clarification.

I've bought a new house as my new PPR and am planning on renting out my current PPR. I'd like to know how I specify the current cost/value of my PPR at some stage in the future when/if I sell.

Should I get a property valuation now or is it done on some sort of trust system (as in the house nextdoor sold around the same time for X).

Also is the value calculated at time of first letting or 12 months later (to take into account eh 12 month grace period one has to shift the a PPR before it becomes liable for CGT)

Thanks in advance,

Noob.

 

[budapest]

Hi Noob,

The current value of your home is irrelevant in terms of the CGT you will eventually have to pay. Assuming the current system continues, it will be calculated (rather unfairly) on the amount of time that the house is rented out (minus the first 12 months) as a proportion of the overall number of years that you have owned the property.

Budapest

 

[asdfg]

One thing to consider is to have the mortgage on the old property (investment) as high as possible i.e. remortgage/release equity as you can offset mortgage interest against tax and have a lower mortgage on the new house.

 

[cloughy]

One thing to consider is to have the mortgage on the old property (investment) as high as possible i.e. remortgage/release equity as you can offset mortgage interest against tax and have a lower mortgage on the new house.

Not technically correct, can't increase your borrowings if converting your PPR to investment, and buying new PPR. What you should do is ensure that you maximise the interest deduction on the Investment property, so if you have a set amount that you can repay between both mortgages, then look to make the Investment Mortgage IO and pay additional capital off the PPR mortgage (weigh up against TRS benefit), but by maxing the Interest on investment and using the capital repayment off the PPR will save you tax, and still leave the same o/s mortgage.

Example
Investment Mortgage 100k (3.6%)
Repayments p/m 1k(interest 300, Capital 700)

PPR Mortgage 100k
Repayments p/m 1k(interest 300, Capital 700)

After 1 year you have the following
Investment Mortgage 91,600
Repayments 1K (274interest, Capital 726)

PPR Mortgage 91,600
Repayments p/m 1k(274interest, Capital 726)

Total Debt 183,200 (200000*3.9%+200000-24000)

Reduction of 26in interest per month, which will mean that your rental profit will increase by 26 and so taxed at 42%&2% levy.

Now if go with Interest Only on Investemnt and instead pay off the extra 700 off PPR mortgage:

Investment Mortgage 100k (3.6%)
Repayments p/m 300(interest 300, Capital 0)

PPR Mortgage 100k
Repayments p/m 1700(interest 300, Capital 1400)

total repayments still 2k p/m

After 1 year you have the following
Investment Mortgage 100,000
Repayments 300(interest 300, Capital 0)

PPR Mortgage 83,200
Repayments p/m 1700(250interest, Capital 1450)

Total Debt 183,200 (100000+83200) - same as before, but tax on rental profit is less as higher interest deduction.

You have to ensure that you can get an IO for investment, and weigh up the cost of reducing PPR interest for TRS, but savings in real terms are considerable.

 

[noobie99]

Thanks to you all for the info.

Is my following understanding correct?

Prop A was PPR for 4 years and rented for 6 years so it's now 10 years since original purchase and I have a CGT on 50% ((4+1)/10) of the existing property value?

Could someone clarify how the inflation adjustment is factored in when determining eventual CGT.

Are there any worked examples out there?

Rgds,

Noobie.

 

[ClubMan]

Prop A was PPR for 4 years and rented for 6 years

Have you already paid the stamp duty clawback on owner occupied properties rented out within five years of purchase or is that liability outstanding?

so it's now 10 years since original purchase and I have a CGT on 50% ((4+1)/10) of the existing property value?

Yes - but it's actually ((6-1)/10) = 50%.

Could someone clarify how the inflation adjustment is factored in when determining eventual CGT.

The [broken link removed] explains how CGT indexation (up to December 31st 2003 or thereabouts - not applicable thereafter) of the purchase price works.

If in doubt get independent, professional tax advice.

 

[noobie99]

Thanks Clubman,

The stamp duty clawback is outstanding as I've not rented the place yet.
Does it have a bearing on the eventual CGT?

Has there been anything to replace indexation? Mortgage interest relief I guess.

N.

 

[ClubMan]

The stamp duty clawback is outstanding as I've not rented the place yet.

So what does this mean above if it's not that it was rented out in year 5 (and thus subject to the SD clawback)?

Prop A was PPR for 4 years and rented for 6 years so it's now 10 years since original purchase

Does it have a bearing on the eventual CGT?

No but the CGT issues are as outlined above.

Has there been anything to replace indexation?

No - indexation stops at December 31st 2003/4 (not sure which).

Mortgage interest relief I guess.

Mortgage interest relief (either owner occupier mortgage interest relief or the ability of investors to offset mortgage interest against rental income) has nothing to do with CGT issues.

 

[noobie99]

Clubman - just to tidy up:

The house is still my PPR as the new house is yet to be completed. It (the current house) will be rented out within 5 years of initial purchase and therefore the SD clawback is outstanding.

Thanks for all the input.

N.