Capital Gain on Mortgage Loan

Capital Gain on Mortgage Loan

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Is a loan which was secured by a mortgage treated as a 'debt on a security' for capital gains tax purposes or would it be covered under the general exemption for loans? The
loan which was originally secured by a mortgage on a property has been repaid at a substantially higher figure based upon a percentage of the resale value of the property.
Is the gain exempt from CGT?
Edwin Monger

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By Paul Soper
05th Sep 2007 14:55

Confusion
Security is not security! Where a mortgage is taken out a lease is granted by the property owner to the lender which is conditional and only becomes effective if the loan is not repaid - the lease is the mortgage and is security for the loan.

However a debt on a security - which is the expression used for CGT purposes is using the word security in a quite different sense from a practical point of view - it is using the expression in the context of shares and securities.

It means that there is a loan where the borrower has created a written acknowledgement of the indebtedness to the lender where the written acknowledgement is enforceable separately from the debt (or covenat as it is called by lawyers for this purpose) Th essential characteristic of a deb on security is that the security is tradeable, transferrable, separately from the original debt that it acknowledges. A Loan stock or a debenture is typical of a debt on a security which would be relevant from a CGT point of view. If the acknowlegement is not capable of being transferred to another it is not a debt on a security,

The increase in value here where the loan is repaid from the proceeds is really in the form of late paid interest on the loan. Note that the borrower will still be liable on the whole of the proceeds even though part has been paid to the lender, it is not allowable as a cost of acquisition, enhancement, defence of title or disposal.

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