brokenhearted.

Good evening!

I have very recently been considering making an overpayment on my mortgage in light of current rates and my old 5 year deal coming to an end. Made an enquiry to the tax guy I use and happened to mention I was considering a lump sum payment to bring the mortgage down. I received an email back advising that I would need to be aware that Capital Gains would possibly become an issue and they could do a calculation for me so that I would know how much I would be liable for. Maybe I am naive but it took me by surprise. I thought capital gains involves selling a property - not paying for one. The only thing I can think of is the potential gain in avoiding interest charges that a lump sum would make possible? Anyone got any experience in this to share or enlightenment? Would appreciate any insight. TY

durham_lad

I've not heard of that either, but not to say that with some mortgage vehicles that paying off early doesn't result in a capital gain.

I would ask the lender to give more explanation. I have certainly paid down mortgages with lump sums in the past with no capital gain issues, but I've only ever had tradition style mortgages. (No maturing insurance policy associated with the mortgage etc)

Pulaski

This almost certainly relates to a capital gain on the FX exposure created, from a USD perspective, by the mortgage, which has an exemption for small gains every month created by the regular monthly payment, but a large paydown, or entire repayment can, depending on how exchange rates have moved since you took out the mortgage, result in a capital gain.

Here's an example to illustrate: say you borrowed £200,000 when the exchange rate was $1.5/£1, from a US perspective you borrowed $300,000. After several years of repayments the principal is now £150,000, but the exchange rate has changed to $1.2/£1. This means that while you have paid off 25% of the principal in GBP terms, in USD terms the balance is now $180,000. So if you pay off the balance you have paid off a $225,000 debt (at the original exchange rate) with, in USD terms, a $180,000 payment (at the original exchange rate), which means a USD capital gain of $45,000.

brokenhearted.

Thank you all for your responses - I managed to make sense of it but was taken aback that I had never been aware of it. I basically have to make sure the lump sum deposit is paid on a day that the exchange rate was at least the same or better. (I have a traditional mortgage) If on the day i started my mortgage the exchange rate was 1.30 then i have to hope the exchange rate when i make a lump sum deposit it is at 1.30 hopefully higher! This might explain a bit better than i can .Foreign Mortgage Gain - PJD Tax

Pulaski

Based on my experience here, I am surprised that you did know about CGT on repayment of a mortgage. You are one of very few people who have posted here on BE asking about it, as compared to many people who have posted regarding some aspect of selling a home in the UK while tax-resident in the US, and one of us "regulars" on BE have brought up the matter of possible CGT on the repayment of the mortgage, in addition to and independent of the CGT computation on the sale of the home.
As I described above, it is critically dependent on the exchange rate, and if you took out your mortgage before the Brexit vote in 2016, then it is possible, even likely that the exchange rate might never reach the rate it was on the day you took out your mortgage.

If you took out your mortgage in the past 8 years then you likely have little to worry about.

There is also a more complex calculation you could perform if the FX rate is currently lower than when you took out your mortgage, to ensure the gain for the repayment transaction is less than the deminimis chargeable amount. I don't recall what it is, a few $00's IIRC, but you can work back from that to calculate how large a repayment you can make without triggering a CGT tax charge, which will vary depending on how far the FX rate is below the rate on the day you took out your mortgage. .... Also I don't recall whether that is limited to once per year, or if you can make multiple such extra repayments per year without triggering a CGT charge.

brokenhearted.

Thank you for your reply.

My mortgage was started in 2019 - and having checked historically it was about 1.28 - - so that's where my threshold will be!!!

Not going to lie - I am going to be hoping for a similar figure when it comes to remortgaging this October as I think it is viewed as refinancing. I think there is a $200 leeway - so hoping if there is a gain it isn't more than 200$. At the end of the day - it is what it is and time will tell. Thank you all for your input - appreciate the help.