# Which of these 2 investment properties should I sell?



## nbc (21 Mar 2014)

Hi

I have been in London for 3 years and am considering buying a place there. I can't do it without selling a property here. If i list the details below I wonder could people advise if there's an obvious answer. Both 3 bed semis in the suburbs of Dublin with rental income of about 1000(less than market rate but good tenants)

1) Purchased 1999 for 120k Current value 240k    mortgage paid off

2) Purchased 2005 200k. Current value 240k Mortgage remaining 120k Rate 5 % 1100pcm 

Property 1 not considered to be in quite as good an area. However 10 mins walk to a Luas and I have just spent 20k refurbishing completely.
If I sell No 1 I will pay off mortgage no 2.
Problems selling No 1 is large cgt bill(although as uk resident not sure how this will affect me) and the fact that it's just refurbished means that if I kept it I wouldn't need to invest much in it over next 5 years of rental.
Am told by local estate agents that both will sell in 2 weeks due to massive demand.
I'm confused!! Is there an obvious choice?
Thanks guys.
nbc


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## Brendan Burgess (21 Mar 2014)

A very interesting question. 


> 1) Purchased 1999 for 120k Current value 240k



A good return. David McWilliams said that we were in a property bubble back in 1999! 

*Sell Property 1 
*CGT €120k@33% = €40k - I think you are liable to pay this. 

*Sell Property 2 
*CGT €40k @ 33% = €13k 

Additional CGT of €27k 

But will you have to pay this eventually anyway? 

*I have assumed both were pure investment properties and you have never had PPR relief on either? 
*If you have, it would change the equation considerably.  We can revisit if one was a PPR. 

*Have you any CGT losses elsewhere? 

*


> If I sell No 1 I will pay off mortgage no 2.


Why? 

Rate 5% 
Tax relief of 50% on 75% of it is worth around 1.9% 
Effective rate 3.1% 

Sounds cheap to me. If you don't have to pay it off, you probably shouldn't do so. 

*So which one? 
*I think that the paying CGT now or paying it later probably doesn't matter that much. 

I would probably make the decision based on your feel for how easy they are to rent out and which will do best in terms of capital appreciation over the longer term.


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## asdfg (21 Mar 2014)

Don't forget to deduct allowable exps when calculating CGT 
     Legal Exps when buying and selling 
     Auctioneers exps when selling, 
     Stamp duty, 
     Pre letting exps etc
      Indexation / Multiplier Relief


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## Brendan Burgess (22 Mar 2014)

My answer just shows you a big fallacy in thinking about such issues.  Although I did say at the end that the decisioin should be made on how easy they are to rent out, the main calculation focus was on the tax implications. 

But you have two investments and you have to get rid of one.  The primary criterion is the return you are getting on your capital, and the likely return. The tax consequences are a factor, but a secondary factor.

So we should look at it like this



 |Property 1|Property 2
Value|€240k|€240k 
Less mortgage|0|€120k
Less CGT|
Capital employed|€240k|€120k
Annual rent||
Less expenses||
Less interest|0|€6,000
Less tax
Net return|
Return on capital So you need to input the rent into this table


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## ronaldo (22 Mar 2014)

I'd sell the property where least CGT is due if my assumption that the rent on both is pretty similar.

You are liable for CGT in Ireland at Irish rates and in the UK at UK rates (with a credit for any Irish CGT due). Therefore, as Irish rates are higher, your total liability will be that calculated under Irish rules.


As non-resident, you are taxed at 20% on Irish rental income (with no PRSI and, likely, no USC - with under €10,036 Irish taxable income after the sale of one of the Irish properties). 


You are then taxed at your marginal rate in the UK, which I assume is 40% if you're on London earnings. You get a credit for Irish tax paid so, in calculating Income Tax, the UK rules are the ones that will give you your total tax liability.


In the UK, you are allowed to offset 100% of mortgage interest against rental income as opposed to just 75% - so your 5% mortgage is actually costing you 3%.


Add to this the fact that your additional €27k CGT savings by keeping the property where more CGT is due will likely result in a lower LTV being required on your new mortgage, it'll result in saved interest on the €27k AND, more importantly, a lower interest rate on the rest of the London mortgage.


My personal opinion is that CGT may reduce in the medium term from 33% to something closer to the long-term average - at which point you may wish to sell the remaining property - but I wouldn't factor this into my calculations.


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## ronaldo (22 Mar 2014)

nbc said:


> with rental income of about 1000(less than market rate but good tenants)



In looking at this, I'd sell both. I realise the value of good tenants but €12,000 per year isn't much on a €240k property - 5% gross yield.


There are other investments that offer more return for less work. 


I'd go for a much lower London mortgage and invest the maximum into a UK ISA every year. Last weeks UK budget increased the annual limit to £15,000. 

Investing £15,000 annually in a stocks and shares ISA, totally free from
tax, is likely to offer a much better return than the Irish property - and means you can forget about filling out two tax returns every year - and for varying tax years (considering the UK one ends on 5th April).


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## Brendan Burgess (22 Mar 2014)

ronaldo said:


> In looking at this, I'd sell both. I realise the value of good tenants but €12,000 per year isn't much on a €240k property - 5% gross yield.
> 
> 
> .



Again, this illustrates the value of the crowd sourcing of opinions on askaboutmoney.

You asked "Which property should I sell?" and I tried to answer that question.

But you were asking the wrong question. As Ronaldo points out, you should have asked "Should I keep either property?" 

Ronaldo makes very good points about LTV mortgages in the UK. The more cash you have the cheaper the rate would be. So if you decide to sell only one, then you should sell the one without the mortgage as it will give you the most cash - assuming that the mortgage is not cross-secured on it.


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## ronaldo (23 Mar 2014)

nbc said:


> I'm confused!! Is there an obvious choice?



Yes, there's no question as to what you should do. If you don't take the advice below, you'll be the tax man's best friend and, despite it possibly appearing like a step backwards, it would be a giant leap forward.



nbc said:


> 1) Purchased 1999 for 120k Current value 240k    mortgage paid off
> 
> Problems selling No 1 is large cgt bill



I notice on this post, you also have a property with a mortgage of €300k and value of €160k.

That's some major exposure there and there is now absolutely no question in my head as to what I'd do. In reducing your exposure to property, you must also minimise your tax liability (there's no point in paying €40k CGT when it can be avoided).

Therefore, what I'd do is sell the property in negative equity and the property with a €120k gain.

With a mortgage of €300k and a value of €160k, the loss crystalised would be in excess of €140k (because you surely paid more than €300k for the property).

Most of this loss will be offset against the €120k gain and you'd have some remaining to carry forward against future CGT due.

You'd achieve €400k in the sale of the 2 properties, pay off the €300k mortgage, have €100k left over and pay absolutely no tax.

Reducing your exposure to Irish property is a good idea but if you are of the mindset that you want an Irish BTL empire and cannot be persuaded to diversify, then you should do what I advise above, purchase your property in London and then, in the future, look into buying another BTL in Ireland - possibly securing the mortgage against your UK property at a much better rate than what's available from Irish banks.

You would be waiting a long time renting out the property in negative equity before the profit, after tax, would exceed the CGT liability encountered by not selling it.


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## nbc (25 Mar 2014)

*.*

Brendan, Ronaldo Many thanks as always for detailed and perceptive replies.#
I don't feel so bad now as you guys were a little unsure initially too! Just a couple of points
1) Ronaldo I am a HSBC customer and like you really like their rates. I also like the way they deal with customers. My girlfriend bought  aproperty for £600000 2 years ago in Brixton. Now believe it or not worth £800000. In the interim she had paid off £100000 so her LTV was < 50%- I told her to ring HSBC to ask for  a better rate and straight away they offered her the lifetime tracker 1.99%- no questions asked so if I can at all I will be keen to go with them. However one can get decent rates from HSBC with a 20% deposit and so having a huge deposit isn't critical. 
2) Yes I have one badly performing mortgage in a town 45 mins from Dublin- Now outstanding amount 300000K and property worth 160k. I raised this here before as you rightly said- Brendan gave an opinion which has been a source of comfort as it had  been worrying me. He said the fact that it was on a tracker(current int rate 1.2%) and generating about 600 euro profit monthly meant it wasn't really a major issue. I also feel that the property will rise in value with time.
3) Regarding the 2 properties we are discussing I want to keep one and I want it to be free of a mortgage as I feel diversity is important- something I have learned the hard way- One property in Dublin and one in London seems better to none in Dublin and one(maybe bigger and more expensive)in London and mortgage free means the rental income is available for me to use now so affords some flexibility to me.

Overall I am thinking that selling the one with the mortgage and less capital gains and holding onto the other which I have completed renovated may be my best option taking all circumstances into account.
nbc


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## Brendan Burgess (25 Mar 2014)

> 2) Yes I have one badly performing mortgage in a town 45 mins from  Dublin- Now outstanding amount 300000K and property worth 160k.



It's very important to give complete information. Otherwise you will get incomplete answers. 

So you have three properties?  You want to sell one and hold onto one and buy a third property? 

While it's a tracker, you still should consider the pros and cons of selling it.  I don't think you should realise Capital Gains on one of the other properties while you have unrealised losses on this.   

It may be worth tidying everything up by selling this and using the losses. I am not saying you should do this. I am saying that you should consider it. 

Who is the lender? They might be open to doing a deal on the shortfall as it gets rid of a cheap tracker and a big amount of negative equity. 

Brendan


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## ronaldo (26 Mar 2014)

nbc said:


> and generating about 600 euro profit monthly meant it wasn't really a major issue


 
This means that it's not a finanial drain. However, selling your property with the lower CGT will cost you €13k in CGT and selling the other will cost €40k. In other words, you'll be managing the property for 22 months, in the case of one, and 67 months in the case of the other before the profit will cover the CGT liability.

Just make sure you analyze your figures fully because you could come to regret exposing yourself to a large CGT bill.


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## nbc (26 Mar 2014)

*.*

Thanks for that. As a UK resident I thought I was liable to pay tax only to HMRC. If so can I not just pay capital gains in the UK which is a lower rate? How was the figure of 13000 calculated exactly? 33% of 40000 which is difference between purchase price and sold price? I'm sure this figure could be reduced by other expenses as mentioned by an earlier poster. I also don't know why someone hasn't taken a case regarding loss of indexation relief which really doesn't make sense to me and is unfair.
Selling the property will result in a loss I agree but only if I sell. I am happy to see what happens over  years. It may well be the case that one day the value of the house may equal the outstanding mortgage. Assuming interest rates stay low for the next few years it is making me a profit of 7000 a year.
(yes I know property values may not increase but I think it's a reasonable assumption- int rates may rise also)

nbc


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## ronaldo (26 Mar 2014)

nbc said:


> Thanks for that. As a UK resident I thought I was liable to pay tax only to HMRC. If so can I not just pay capital gains in the UK which is a lower rate?


 
Unfortunately, on a property located in Ireland, you must pay Irish CGT on the sale. You then need to complete your UK tax return working out your liability if you were paying the CGT under UK tax law. If your UK liability exceeded the Irish liability, which it won't due to rates being lower, you would have had to pay the difference to HMRC.




nbc said:


> How was the figure of 13000 calculated exactly? 33% of 40000 which is difference between purchase price and sold price? I'm sure this figure could be reduced by other expenses as mentioned by an earlier poster.


 
The actual figures will be something along the lines of:

Sale Price - Purchase Price = €40k gain

Gain - Allowable Costs = Taxable Profit

Allowable costs can include legal fees when buying and selling, estate agent fees when selling and any major refurbishment work you done to improve the property. Let's assume no major refurbishment was done and your professional fees amounted to €5k (for simplicity). This would give you a taxable profit of €35k.

You get an annual allowance of €1,270 before CGT is due so would be taxed on €33,730 at 33% - giving a total liability of €11,130.


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## 44brendan (26 Mar 2014)

Yes you can offset refurbishment and other sale expenses from the CGT bill, provided you have not claimed the refurbishment against rental income. As the asset is located in Ireland you will be charged CGT at Irish rates.


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## nbc (26 Mar 2014)

Thanks Ronaldo and Brendan. Ronaldo between the jigs and the reels , if I am going to sell one of the 2 original properties can you see why I feel the one with the mortgage is the one I'm thinking if going for?
NBC


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## ronaldo (26 Mar 2014)

nbc said:


> Thanks Ronaldo and Brendan. Ronaldo between the jigs and the reels , if I am going to sell one of the 2 original properties can you see why I feel the one with the mortgage is the one I'm thinking if going for?
> NBC


 
Yes, I can understand the reasonings behind selling the one with the least CGT due as opposed to the one with the most.


I still think it's a no brainer to sell the loss making one first but each to their own. I know it's on a 1.2% tracker but, if you sold it first you'd be able to:

Sell the mortgage-free property without liability to CGT
Use the €240k proceeds, together with the €160k property sale to clear the €300k mortgage
Use the €100k remaining as a deposit for your UK property
I suppose it is difficult to let go of a 1.2% tracker though.


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## Brendan Burgess (26 Mar 2014)

ronaldo said:


> I still think it's a no brainer to sell the loss making one first but each to their own.



Whatever else it is, it is not a no brainer. 

It's a very finely balanced decision.  

I would hate to give up the cheap tracker. 
If he sells the property with the mortgage,  he is going to pay only a small amount of CGT. 

He can still keep the CGT losses on the third property to set against a future sale of the mortgage-free property. 

If the sale of the second property with the SVR mortgage raises enough, then that is probably the right thing to do. 

The key issue is that the mortgage free property should not be sold until after Property no 3. 

Brendan


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## ronaldo (26 Mar 2014)

Brendan Burgess said:


> Whatever else it is, it is not a no brainer.
> 
> It's a very finely balanced decision.



Sorry, it was a poorly explained post before with me trying to finish up and get out of the office.

The thing is, I'm not so sure it's finely balanced if you take the whole picture of the OP into consideration including, what appears to be, pretty low yields on his investment properties. I think the OP is better to sell everything up and, to do this, he's obviously best starting with the loss maker.

When doing calculations like these, I would always put the interest savings lost in the UK mortgage as an expense against the profit and loss accounts of my Irish properties to calculate my 'true' profit.

For example, if I aimed for a £300,000 mortgage on a London property and gaining a larger deposit by selling an Irish investment property resulted in a reduction of 0.5% on my UK mortgage, I would include the loss of this 0.5% (£1,500) as an expense against rental income in Ireland to see whether I truly was making as big a profit as I thought I was.

I'm not sure whether it makes sense to do this but I feel it does - there's no point in putting the effort into being a landlord to make the equivelant of £1,500 when you're losing the same by not selling up and putting the proceeds towards a higher deposit in the UK.

Of course, future capital gains can be considered - but I don't usually do this because they're impossible to quantify.


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## Brendan Burgess (26 Mar 2014)

> I'm not sure whether it makes sense to do this but I feel it does



Hi ronaldo

It absolutely does, assuming that the savings are long lasting.  When you raised this first, I thought to myself "how clever!".


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