Let's assume that you entered the buy to let market with an interest-only mortgage of £85,000 on a property worth £100,000. Over the past years the value of your property has doubled and it is now worth £200,000 with £85,000 still owed on the mortgage. There are three options open to you:
The first is to leave things exactly as they are. Each month you will receive rental income form your tenants and you can watch your bank balance steadily grow. It's a safe strategy, but it's unlikely to make you rich.
Alternatively you could put the property on the market. However, if you intend sell it is important to factor Capital Gains Tax in to your calculations. Once you have repaid your mortgage and covered your initial £15,000 investment, the remaining £100,000 is liable for taxation. In the worst-case scenario this could mean loosing out on as much as £40,000. Even if you have claimed every allowance and owned the property for ten years you will still need to pay Capital Gains of £24,000. You have still made a profit of between £60,000 and £76,000, but you are no longer benefiting from any potential increases in property prices.
The third and arguably most savvy option is to consider remortgaging. If your rent and property value have doubled, you are now in a position to double your mortgage. This would raise £85,000; there's no Capital Gains Tax to pay and the property is still yours. Capital gains tax will still be payable when you sell the property; The Money Centre recommends you speak to your accountant for a personal review.
How you use the money is up to you, but if you set some aside as a deposit on another buy to let property you have the beginnings of a property portfolio.
