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  • Mortgages & Finance

    Long term refinancing strategy vs CGT

    Hi all

    I understand that one strategy for periodically pulling money out of an existing portfolio or property is to wait until the value has gone up (the time frame for this might depend on market conditions, but say a couple of years in an upwards market) and then refinance to the same LTV thereby effectively drawing the differential between previous value and new value as tax free income which can be reinvested or spent as required.

    This sounds like a fantastic methodology to me, especially if you have a sizeable portfolio so the process can be staggered across multiple properties, providing something every year.

    However it occurred to me that after a while, you could end up in a situation where you couldn't sell the propertie(s) as the CGT liability might be more than profit from selling after paying off the debt.

    An example (simplified for clarity) might be:

    Initial purchase price: £100k
    Bought with £75k mortgage

    Many years later (and after multiple refinances):

    New Value :£1,000,000
    Final Mortgage amount: £750k

    On selling the property (and paying off finance) you would be left with 250k
    BUT
    CGT would be based on profit of £900k. This might be around 250k.
    In this case you would basically walk away with nothing after selling.
    If the property was worth £2M (with £1.5M of 75% debt) , you would be left owing money as the CGT would be more than the profit after paying off the mortgage.

    Am I getting something wrong here?
    If not, it would seem that holding and periodically refinancing would carry significant risk in the long term...

    Grateful for tribal input!
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    Hi
    I understand what you are saying. Carl Bayley in his excellant book "how to save propertytax" covers it. What you say is completly right and you are not missing anything except the big picture. You cant treat each property individually but your entire portfolio as a business.
    If you draw down on mortgages for your personal expenditure, holiday car etc. You are playing a dangerous game. However if you are reinvesting in properties, where is the problem. Yes it is true that each property ou have constantly mortgaged up to the hilt you could end up owing more money in tax than what you make but you have all the capital growth on all the properties you have purchased.
    Lets take your example £750K on a house purchased originolly for £100k. That means you have pulled out of property for reinvestment £675k aside from originol mortgage. That £650k has now gone on to purchase 5-9 further properties all increasing in value. Yes it is true you could also mortgage those properties to the hilt, but as long as you keep investing your portfolio will increase expotentially and so your capital growth and rental yield.
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    Thanks for the reply Steve.

    Yes, I suppose that if the money is all being re-invested then the portfolio as a whole can be seen as a business entity.

    The other option (I suppose) would be to be strategic and if you know you want to exit in (say)5 years, then de-leverage slightly or don't borrow so much to make sure your LTV is low enough to enable selling when you plan to.
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    5 years is not going to be long enough to realise a significant capital gain. although I do remortgage every 5 years to buy more properties. I will remortgage on a 5yr fix so I know exactly mortgage vs rent and then use the money from that one property to buy 3-4 more. I tend to keep about half the portfolio on lowish and decreasing LTV (these I can sell or mess around with if I need emergency money) and leverage others to expand
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    Sounds like a very good strategy.
    Presumably if you're remortgaging every 5 years, you would either have to be increasing the LTV or relying on capital growth in order to pull money out. (esp enough to buy 3 or 4 more..)
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