# Interest only mortage on buy to let ending - Tax considerations



## car (15 Apr 2021)

Moved house in 2005.  Like many others Leveraged old house as a buy to let on an interest only so we could purchase our PPR. 

Investment property was only going to be a for a short time to facilitate the move but as we all know everything crashed so was stuck with it as negative for long time. Its thankfully just out of neg equity now and looking to sell to clear it as mortage ends in few years.  So heres the challenge.  

House value now. 230k
Investment mortgage value 220k
As we'd bought intially really low the tax bill if sold now will be about 30k, I think we might be able to write a little of that off but for maths sake can leave at that.   

So we have to find 20k from somewhere.

Longer we leave it, the hope is the value of the house grows to cover that but the tax % grows too.  And yes house value may fall too so looking to get out as price as been stagnant for a few months.  

Question is if we sold today, does the 220k of total sale price go to Pepper to clear the mortage and we then have to look after our tax considerations separately or does tax get paid first and we have to settle with Pepper separately?    Id guess Pepper clear it and tax gets paid separately?  How long to pay the tax, is it like any investment, October following year?


----------



## skrooge (15 Apr 2021)

You will have to clear the mortgage with the proceeds first otherwise your current lender will not relinquish it's interest in the property and you wouldn't be able to sell. Your solicitor will likely do this automatically.


----------



## NoRegretsCoyote (15 Apr 2021)

car said:


> if sold now will be about 30k,



You will get PPR relief for the period of ownership before 2005.

Don't forget there is indexation relief as well for ownership before 2003 which should reduce the effective chargeable gain.

Example 3 on this page shows you how to use indexation relief.

Apologies if  you know this but it's easily overlooked.


----------



## Leo (15 Apr 2021)

skrooge said:


> I could be wrong on this but I think CGT will only apply to the element of the increase in value that applied from 2005 to date of sale. Prior to 2005 it was your PPR and that part would be exempt from CGT.



It's the full gain in value for the duration owned by the percentage of time it wasn't a PRR.


----------



## NoRegretsCoyote (15 Apr 2021)

skrooge said:


> I could be wrong on this but I think CGT will only apply to the element of the increase in value that applied from 2005 to date of sale. Prior to 2005 it was your PPR and that part would be exempt from CGT.



Its on a straight line basis. If property was bought in 1991 for 130k, a rental from 2005, and sold in 2021 for 230k the PPR relief is calculated using 14/30*(100k)

It's a bit silly as the increase in value was basically all during the period the house was owner occupied. But this policy dates from a period where there was no data on house prices.


----------



## Brendan Burgess (15 Apr 2021)

Hi car

I presume that this is a cheap tracker Bank of Scotland mortgage? 

If so, when does is the mortgage term up? 

The rent after tax and expenses should be well in excess of the interest payments, so it's a very profitable investment and, as a general principle, it should be kept for as long as possible. 



car said:


> Longer we leave it, the hope is the value of the house grows to cover that but the tax % grows too.



Which would you prefer? 
To sell it for €230k and pay €30k CGT , or 
Sell it for €260k and pay €40k CGT? 

Brendan


----------



## Brendan Burgess (15 Apr 2021)

While you should try to keep a profitable investment as long as possible, there is also an element of risk avoidance.

If you have to clear the mortgage of €220k at the end of this year and the value exceeds €220k, then maybe you should sell it now, so that there is no risk of negative equity.

The problem with negative equity is that you won't be able to sell the property without the approval of your lender and that could take time. Meanwhile, your credit record is being damaged. 

But if you don't  have to clear the mortgage until the end of 2022, then it's probably worth taking the risk. 

In the meantime, you should apply any savings or other investments you have to reducing the mortgage balance, so that there is a comfortable margin between the sales proceeds and the mortgage amount. 

You could have a chat with the lender on your family home and ask them to reduce the mortgage payments to allow you to pay down the investment property.  Obviously, delaying paying a home loan at 4% to clear a tracker at 1% is not a great idea financially.  But some element of it might be worth doing to give you the margin you need.

Brendan


----------



## car (15 Apr 2021)

Brendan youre correct on all fronts, its certainly a trade off between keeping it and paying a little bit more tax on a a lot higher profit at sale time but we're making the risk of assumption that the house prices will retain some growth over say next 4 years until term is up.

It was a national Irish mortgage which transferred to danske and then to pepper.  The terms arent as good as we would wish for, nearly 5% on the IOM and 3.5 on the PPR.   Pepper wont enter any discussion about restructiring, Ive tried several times.    If I moved provvidor Id be saving thousands per annum but no other bank will go near it, Ive tried 3-4 times with all banks and mortgage advisors over the years, although if someone knew of a providor who is doing those now Id certainly talk to them.   

Yes there is some income from the rent but after tax/mortgage/costs its maybe about 3k a year income.  Its an old house, things go wrong a lot, painful to have tbh.   I think will sit on it for a little bit more, end of '22 as you suggested seems about right but starting the exit strategy  now.

thanks for advice here and discussion.


----------



## Brendan Burgess (15 Apr 2021)

car said:


> nearly 5% on the IOM and 3.5 on the PPR.



You should probably give all the figures.

Are you saying that the PPR is with Danske/Pepper as well? 

With 5% on the investment, it's the same as 2.5% after tax.  

So it's not a big financial loss to reschedule a 3.5% PPR mortgage to allow you to overpay the investment property.

But at 5% it's probably not very profitable. So I think you should sell it as soon as you are able. The risk well outweighs the potential gains.

Brendan


----------

