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  • New Members

    Need advice on if this is a good idea

    Hi
    I bought a small flat in London in an old council block roughly 18 year ago.

    I still have a small outstanding mortgage but now I'm looking to move in with my partner so I'm considering selling the property. The reason I'd like to sell the property is because I've made quite a lot of profit on it - if I sell it down the line I'd have to pay a lot in CGT but I think it would be better to take the profit now as it's my primary residence at the moment.

    The other reason is that Id like to move into property development more seriously - so use the money that I make from the flat to make a start in doing a buy to flip project and seeing how it goes from there. Does this sound reasonable?

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    Interesting question, and I am not qualified to give financial advice.

    But my thoughts:-

    1) I personally think you are possibly on the right track in terms of making the most of your PPR allowance now, and not paying CGT; you need to work it through with numbers though and it all depends on your timescales and beliefs on future property inflation. If you rented for say 2 years, what tax would be payable, assuming property prices are flat? Assuming you start now, you will have owned say 20 years when you sell, all bar last 9 months should be tax free, so if my maths are right, only 6.25% (15 months from 240) of your gain would be taxable. If the gain is say £300k, that would make the taxable gain £18.75k, potentially deduct about £12k CGT allowance depending on your circumstances, and tax payable would be between about £6k, which the rental income might more than cover. Repeat calcs for different rental periods, and different future price deviations etc.

    2) You could also rent for a year, and sell before end March 2020, before coming into realms of paying CGT. But note the change to PPR rules, post Apr 2020 there is only a 9 month tax free period at the end of ownership to take advantage of. Is it worth renting it, I don't know.

    3) Could you release enough of the equity by remortgaging, that you could do the development work? If yes, would it be worth keeping the flat and renting it? Would the gains you hope to make through development also happily pay any potential future CGT, or would rental income cover it? Do you feel the need to keep a property as a safety net?

    4) Do you want the hassle and stress of being a landlord?

    5) What will the market be like for flipping in next couple of years? And do you have the skills or contacts to make a go of it? Where will you flip, London may have less potential, some other areas of country still seem to be growing price wise.

    Just a few thoughts and considerations to get your head around.

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    Hi Wayne and welcome.

    I am always loathe to sell a property.  There are costs and tax implications associated with that, and you don't need to sell a property to access equity.

    If I were in your shoes, I would re-finance that property to a BTL mortgage, repay the existing resi mortgage, and what's left is your "play" money.

    Think of your current flat as a tree which you can take a clipping (equity) from, to grow another tree.  Why would you ever cut down a tree when you don't need to?!

    This same concept applies to buy to sell. You are cutting down the tree (selling).  With buy/refurb/rent out, you keep the tree and release another clipping to start growing a third tree ... and so on.

    See - Buy to let vs. Buy to sell - trying to compare an apple to an orange.

    You could take an equity clipping from your current flat, use that to buy another residence, perhaps in need of improvement/refurbishment, and then force the appreciation while living there.  Then you can repeat the process a couple of years later.

    There was a programme on TV many years ago, where someone traded their way up to a million pound home by undertaking this strategy, although they sold the property each time, rather than releasing equity and then renting it out.

    Most people arrive at their retirement with one property (their main home) which has to be cut down to finance their retirement because they do not know any better. 

    Property investors arrive at retirement with an orchard, because they took clippings and grew additional assets from the parent tree (in this case your flat).

    See - Using residence as stepping stone to BTL where I tell the story of how I did exactly the above and built our portfolio over the past 15 years.

    A conversation with a reputable mortgage broker like the team at Property Tribes Financial Services on 01206 654444 will assist you in understanding your options, which will greatly depend on what financial products you, as an individual, have access to.  Such a conversation can bring great clarity to the direction you can take, because the finance (money) always has to come first.

    Hope that helps give an alternative direction and some additional food for thought.

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    Thanks Vanessa and Neil. I knew this would be the right place to come! You've both given me a lot to think about and investigate - I appreciate your help.

    Wayne

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    All valid points above but the most important one is that properties don’t sell right now in London. You would have to take a hit on the price. Release some equity instead, its a great time to buy right now.

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