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Should I pay off mortgage on BTL before selling?

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Hi,

I bought a house around 24 years ago and lived in it for 3 years, after which I have been letting it since. There is around £50K of mortgage to be paid off, with the mortgage end date within the next 12 months. The house is worth around £400K. My question is: would I pay more tax if I pay the mortgage off first from my savings and then sell the house, or should I sell the house and pay the mortgage off with the sale proceeds if that would reduce my tax bill.

I hope I have explained my query well enough. Looking forward to your response!

Replies (15)

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By Tim Vane
09th Apr 2020 00:05

If you’ve got savings to cover the outstanding mortgage then you would almost certainly have been better off paying off the mortgage much sooner than this. My advice would be to pay it off soonest. Do you not take financial advice from somebody?

The tax situation is a complete red herring.

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By johngroganjga
09th Apr 2020 06:49

When you pay off the mortgage is no more relevant to the calculation of your tax liability than the colour of your socks.

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Replying to johngroganjga:
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By whitevanman
09th Apr 2020 09:56

I think a sock tax is a distinct possibility when the Chancellor comes to pay for the current crisis.

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Replying to whitevanman:
Hallerud at Easter
By DJKL
09th Apr 2020 10:07

Assessed on number of socks worn or by number of colours within said socks?

If the former it is going to be expensive putting on my walking boots whilst wearing two pairs, if the latter I am fine, buy at least ten identical pairs, preferably black, rinse and repeat. (Avoids having to match socks or wear odd ones in garish colours)

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By Tax Dragon
09th Apr 2020 07:02

For the avoidance if doubt, the answer is as set out by the previous respondents because there is no tax relief either way, not because there is. Just as you did not get taxed on the mortgage when you took it out, so there is no deduction or allowance when you pay it off.

Similarly, in the disclosure of your letting income, you should have been obtaining tax relief for the interest on the mortgage, but not the capital repayments. If you have claimed for the lot, you should tell HMRC and put it right.

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Replying to Tax Dragon:
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By Matrix
09th Apr 2020 07:19

Tax Dragon wrote:

you should have been obtaining tax relief for the interest on the mortgage.

Subject to the restrictions brought in from April 2017.

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Replying to Tax Dragon:
Hallerud at Easter
By DJKL
09th Apr 2020 09:45

It actually sounds like it may have been an interest only mortgage given £50k is repayable in 12 months, that or a hybrid (part interest only part cap/int)

The current £400k valuation maybe being something like bought for circa £70k to £100k 24 years ago; by chance we bought our current house a little over 22 years ago and it was, at least before Covid 19 came along, worth circa 4 times what we paid.

If I was the OP I might not right now deplete my savings by repaying and reducing my liquidity as none of us know how long things will last and how long the property market will be in limbo; right now cash (liquidity) is king.

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Replying to DJKL:
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By Tax Dragon
09th Apr 2020 10:20

It's weird. Because the "if" in the middle of my final paragraph was in my mind at the start of it, I thought I had written the whole thing in the conditional. Reading it cold, I see I hadn't.

And now I find myself musing on the quirks of the Dragon brain. That's not good. I think I'm starting to show symptoms of lair fever (our equivalent of your bothy fever... or what they call cabin fever, elsewhere).

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By Amoojun
09th Apr 2020 19:53

Thank you all for your responses. I am lookig at my socks in a different way now.

Apologies if I was not clear enough. As DJKL deduced, this is an interest ony mortgage for a property bought around 80K and now worth 400K+. The amount of monthly interest payment is very low.

I have been claiming tax relief on the interest on the mortgage. I guess my query is therefore on Capital Gains tax. If I pay off the £50K mortgage off and then sell the property (say a couple of months after) the CG tax would be computed on the profit, but if I sell it and then use the proceeds to pay off the loan, then I would pay less CG tax? It seems logical that way but that seems too simple. Am I missing the wood for the trees? Thanks.

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Replying to Amoojun:
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By Tax Dragon
09th Apr 2020 15:12

The mortgage is not part of the profit calculation. Your profit is £320k less qualifying expenses - the mortgage is not one of them.

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Replying to Amoojun:
Hallerud at Easter
By DJKL
09th Apr 2020 15:24

The capital gain is calculated on selling price net of selling expenses (legals etc) less original cost and improvement costs for those improvements still in existence upon sale. Part of the gain (first three years and last 9 months) will fall out of tax.

So say sell 400k, cost 80k, gain 320k. The gain say is over 25 years once you manage to sell, so 3.75 years exempt (first 3 plus last 9 months), 21.25 years chargeable, so roughly 48k exempt leaving 272 ksubject to CGT, but you may also have your annual allowance of £12,300

If you had gone to an accountant earlier and sold before Monday you could have reduced the gain by another 40K, but such is life.

The loan makes no difference to the CGT bill, none, not a jot.
(modified to include enhancements/improvements in my comment)

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By Amoojun
09th Apr 2020 15:30

I see, so it doesn’t matter when one paid off the mortgage, it could have been 10 years ago, and I can just deduct the initial mortgage from the sale price.
Thanks!

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Replying to Amoojun:
Hallerud at Easter
By DJKL
09th Apr 2020 15:41

No, you deduct the cost of the asset not the initial mortgage,the amount you borrowed towards the original cost is irrelevant.

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Replying to Amoojun:
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By Tax Dragon
09th Apr 2020 15:41

Amoojun wrote:

I can just deduct the initial mortgage from the sale price.

I am beginning to understand why you don't have an accountant. No-one would want you as a client.

For the last time (from me) IGNORE THE MORTGAGE. Profit is fundamentally the difference between the buying and selling prices.

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Replying to Tax Dragon:
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By Amoojun
09th Apr 2020 19:55

:) Thanks.

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