So to summarise this is the current state of Aleesha’s property portfolio:

Two bed terraced property: Purchased for £60,000. Current value of £175,000 with outstanding mortgage of £148,750

Three bed detached property: Purchased for £150,000. Current value of £250,000 with outstanding mortgage of £212,500

FIVE Apartments: Purchased for £125,000 each. Current value of £175,000 each with an outstanding mortgage of £148,750.

THREE villas in non-UK countries valued at a total of £750,000.

So in total here portfolio is now worth over £2million and she has become a multi-millionaire.

So what does all this mean?

Well, firstly it means that Aleesha, has grown a very sizeable portfolio in a few years and has indeed become a property millionaire (well on paper anyway!).

However, she has never considered her capital gains tax position during her continued investment, and this means that on each of her UK owned properties she actually now owes more than what she originally paid for the property.

This in turn means that unless she has a considerable amount of savings she is unlikely to be able to pay the CGT bill on the sale of the property from the actual sales proceeds.

Lets take the example of her very first investment property, which she purchased in 1996 for £60,000. If she sells at the current market value of £175,000 then she has made a £115,000 capital gain (minus her annual CGT exemption of £8,200) and could be liable to pay tax of 40% (i.e. £42,720) of this amount (ignoring the deductions for indexation and taper relief and costs).

However, given that she only has £26,500 of equity in the property she will be required to find an extra £16,220 just to pay the taxman, thus meaning she has made no actual profit and could incur additional debt paying the taxman. She may think that she can sell another of her properties to fund the required £16,220, but again she will face the same problem, where the sale of the property will not cover its own CGT liability.

Now, if for some reason she needed to sell all her properties then you could see how she could end up paying the taxman quite a considerable amount of money, and have nothing to show for it herself at the end of it.

So, although Aleesha is a millionaire property investor, she could up without a penny to her name and with significant debts if she decides to sell.

Her foreign properties do not help her either, as there is local CGT (often a compulsory withholding of a percentage of the sale proceeds) and the balance due to the taxman here after deducting the foreign tax she has had to pay.

How to overcome the problem?

There are a number of ways to tackle this tax problem and these are outlined below:

Firstly, she could decide not to purchase anymore properties and continue to just hold the properties and wait till they have increased in value, or if purchased with repayment mortgages, enough of the loans have been repaid; that the sales proceeds could cover any tax liability quite comfortably. However this may take 5, 10, or 20 more years! One tax advantage of waiting is that after 10 years of ownership of each property; by virtue of taper relief the CGT rate will reduce from 40% to 24%.

Secondly, she could leave the UK for 5 complete tax years and then sell the properties in either the tax year following her year of departure and any of the next 4 tax years. By doing this she would wipe-out any UK CGT liability. Given that six million UK residents are expected to emigrate by the year 2020 this could be her chosen option. Also, she may quite fancy living in one of her foreign properties. She would also have to consider local CGT in her new Country of residence, on her UK property sales. This would be 15% in Spain. In France, she would at present have no CGT on her UK properties (this may change!) and in Cyprus she would have to pay 20%.

Thirdly, she could avoid CGT, if her properties taken together were considered to be a “Business”. She could then transfer them into a Company and claim Incorporation Relief. This would have the effect of enabling the Company to sell the properties with little or no CGT liability. Again Daniel Feingold is aware of the detailed steps necessary to help achieve this.

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