Cash Clinic: Can I count on my rented properties to pay off my mortgage?

Published on Thursday 2 September 2010 15:56

Q: I BOUGHT my residential house with an interest-only mortgage with the intention that when I sell my buy-to-let (BTL) properties the gains would be used to pay the capital for my residential property.

Thus I have been borrowing from the equity in my residential property to maintain my BTL portfolio.

When I sell my BTL properties I am hoping to offset my capital debt on my residential property. Could you please advise me as to how I can successfully do this as it is giving me sleepless nights.

KS Glasgow

A: I note from your query that you currently own a private property in which you reside, financed by an interest-only mortgage, and have several buy-to-let (BTL) properties.

Your plan for the future is that the capital appreciation that has arisen on your BTL properties will be sufficient to pay the balance on the interest-only mortgage secured on your home.

Two separate issues arise from the capital gains tax (CGT) perspective. Firstly, should you sell your own home, there will be no taxable gain arising on any uplift in value, assuming that this property is indeed your main residence.

However, should you sell any of your BTL properties, CGT will be due on any increase in the value after the deduction of allowable expenses and exemptions. From your letter it is unclear how the purchase of the BTL properties was financed.

But I would point out that any capital debt over the property by way of mortgage would not be allowable to offset against your CGT bill on the sale of the either the BTL property or your main residence, and in the same vein any capital debt on your own home cannot be offset against any gains arising in respect your BTL properties.

Mortgage interest on the other hand will have been available to offset against any rental income.

You can, of course, utilise any free proceeds from the sale of your BTL properties to reduce or redeem the mortgage over your own home at any time.

• Glen Gilson is partner and head of private client and financial services at HBJ Gateley Wareing.

• If you have a question, write to Jeff Salway, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [e-mail]. This above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd and HBJ Gateley Wareing accept no liability on the basis of this article.