Hypothetical Cgt avoidance via loan?

[anonymous-user]

Hypothetically::::::

Say I own a property worth £300k and that has made a capital gain of £250.

If I sold it I would have to pay say £80k cgt.

What if secured a £300k loan against it and allowed the property to be taken as security.

Would cgt be payable on the loan?

[Eric Mc]

Yes.

Next question.

CGT is not payable on "loans", It's payable on "gains" (the clue is in the title). What you do with the gain is NORMALLY of secondary importance.

However, if you used the gain to buy a similar type of asset, you could claim Rollover Relief - which is basically a deferral of the CGT until the second ( or third or fourth) asset is sold.

[anonymous-user]

So even if the Loan against a btl for example that had a large gain and let’s say the loan was only £10k, is repossession classed as disposal at full market value?

[anonymous-user]

So even if the Loan against a btl for example that had a large gain and let’s say the loan was only £10k, is repossession classed as disposal at full market value?

[CharlesElliott]

If the property is repossessed, it is treated by HMRC as if the debtor sold it.

[Groat]

Eric Mc said:

Yes.

Next question.

CGT is not payable on "loans", It's payable on "gains" (the clue is in the title). What you do with the gain is NORMALLY of secondary importance.

However, if you used the gain to buy a similar type of asset, you could claim Rollover Relief - which is basically a deferral of the CGT until the second ( or third or fourth) asset is sold.

You don't get the relief if you sell a btl and buy another (apart from FHLs)

[Countdown]

AnotherUsername said:

Hypothetically::::::

Say I own a property worth £300k and that has made a capital gain of £250.

If I sold it I would have to pay say £80k cgt.

What if secured a £300k loan against it and allowed the property to be taken as security.

Would cgt be payable on the loan?

If you've secured a loan against it you haven't sold it which means the gain hasn't crystallised. So I'm not sure why CGT would be payable at this point

[Eric Mc]

Groat said:

You don't get the relief if you sell a btl and buy another (apart from FHLs)

The OP didn't specifically mention what type of property he was referring to.

[number2]

Unless OP is thinking of defaulting on the loan and handing the property to those who have a charge over it. This would have other implications though too.

If remortgaging to release capital why would that incur CGT? It wouldn't.

Transfer of ownership would if that's effectively what is being considered.

[Eric Mc]

Using the asset as collateral to receive additional loans is not a capital disposal - so there is no sale or transfer of ownership and therefore no gain.

[NickCQ]

Eric Mc said:

Using the asset as collateral to receive additional loans is not a capital disposal - so there is no sale or transfer of ownership and therefore no gain.

This is how the US super-rich appear to fund their lifestyles. If you are Jeff Bezos and are sitting on a pile of unrealised capital gains in your Amazon shares, you can just borrow against it at very low cost and never crystallise any of that gain or pay taxes on it.

If the OP owned a divisible asset he could sell it in bits over time to stay under thresholds, but that (I assume) is not possible with property.

[Groat]

Eric Mc said:

Groat said:

You don't get the relief if you sell a btl and buy another (apart from FHLs)

The OP didn't specifically mention what type of property he was referring to.

Nor did he say he was intending to roll over the sale proceeds.

[anonymous-user]

Ok, I’ll try and clarify:

A second property valued at £300k with a gain of £250k

Regardless of loan amount, what happens to the capital gain if property is surrendered as security?

[anonymous-user]

In answering it seems as though Hmrc consider it sold at point of repossession

[NickCQ]

AnotherUsername said:

In answering it seems as though HMRC consider it sold at point of repossession

Extinguishing the debt is just another form of consideration. It would be a fairly obvious workaround for properties with latent CGT if you could just take out a high LTV loan and immediately default...

[Groat]

As tax avoidance schemes go, that one comes in at the silly end (imo).

[Eric Mc]

AnotherUsername said:

Ok, I’ll try and clarify:

A second property valued at £300k with a gain of £250k

Regardless of loan amount, what happens to the capital gain if property is surrendered as security?

How is the gain being crystalised? In other words, what financial transaction are you enacting to dispose of the property that generates an actual Proceeds on Disposal? You must be actually disposing of the property before there can be a gain.

What do you mean by "surrendered as security"? Are you planning on gifting the property to a lender in order to get cash? If that is the case, you have actually sold it for cash and therefore it is a straightforward sale - with resultant capital gain and related tax.

Edited by Eric Mc on Tuesday 12th October 13:37

[anonymous-user]

Excellent - thanks for the reasoned responses. On to the next question!

[NickCQ]

Groat said:

As tax avoidance schemes go, that one comes in at the silly end (imo).

More or less silly than setting up a film finance partnership ;-)
Those were basically the plot of the Producers but with a QC's opinion.