TAX PROFESSOR

Our Tax Professor will answer as many email questions as practical but cannot guarantee to respond to all. His responses, which will be posted in the ‘Tax Professor’ section of Residential Landlord are personal opinions based on his long experience as a tax adviser.

Although every care is taken with replies, the advice that is given will be general in nature and landlords confronted with specific tax, legal and technical issues are advised always to consult with professionals before taking action. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of answers given by the Tax Professor.

Furnished or Unfurnished?

I know that the 10% wear and tear allowance is only allowed for furnished residential property lettings. My question is whether my property counts as furnished or unfurnished. It is a two bedroom flat let with: One double-bed; One sofa; Washing machine; Fridge/freezer; Dishwasher; Oven; and Hob.

There is also a large build-in wardrobe in the master bedroom and a small breakfast bar in the kitchen. We have not provided any furniture for the second bedroom (which a tenant might elect to use as a study or dining room), nor have we provided a dining table or any seating other than the sofa. We have not provided any crockery, cutlery or kitchen equipment.

Based on this, would we be able to claim the 10% wear and tear allowance or must we elect for the ‘renewals basis’? Also, even if we are able to claim 10% wear and tear now, what happens if a future tenant asks us to remove the bed or the sofa (because they have their own)?

TP writes: In order to provide a measure of relief for the costs of furniture and furnishings in the let of a furnished dwelling house, HM Revenue & Customs provide, by way of an extra-statutory concession, the Wear and Tear Allowance.

The concession provides a deduction from the rental profit on furnished property equal to 10 per cent of the net rent received - the ‘net rent’ being the rent paid by the tenant less any charges or services borne by the landlord that would normally be paid by the tenant e.g. council tax and rates.

However, the concession itself does not provide a definition of “furnished”. HMRC’s Property Income Manual states that a furnished property is “one that is capable of normal occupation without the tenant having to provide their own beds, chairs, tables, sofa and other furnishings”. The Manual also draws a distinction between a furnished property and a part furnished property with the allowance not available for the later.

As there is no hard and fast rule as to whether the property is considered fully furnished or part furnished, it will be a matter of judgement given the specific circumstances. One key indicator would be the advertising of the property i.e. is it advertised for let as “part furnished” or “fully furnished”?

If furnishings are removed, it is likely that this will point more towards the property only being part furnished and, as such, a stronger argument for the wear and tear allowance to be unavailable.

Buy to let mortgage

I owned a property outright and have moved to a new one. I took an interest only BTL mortgage to raise a deposit for my new property on my old one.

I am in the process of renting the old property out - can I offset the mortgage interest from rental income for taxation purposes along with letting fees, etc costs etc?

TP writes: Generally to obtain tax relief for loan interest, the proceeds of the loan have to be used for the letting business. However, when an existing property is first introduced into a letting business the tax rules allow the property to be refinanced and tax relief to be obtained even if the proceeds of the loan are not used for the letting business.

In practice what this means is that when you begin letting the property, you can release the current equity in the property by means of a buy to let mortgage and obtain tax relief on the interest. This will be the case even if you use the funds to acquire the new property. However, releasing the equity from the existing properties does not have to be done at commencement of the letting, it can be done later. The only limitation being that tax relief is only available on borrowings up to the value of the property when the letting commenced.

How do I work out what % of tax I have to pay?

How do I work out what % of tax I have to pay? If I receive £1,100 rent per month how much of that will be taxed?

Apart from this rental income my wife and I have a combined income of £50k from our daily jobs.

TP writes: You state that you receive £1,100 rent per month. I am assuming that the property is held in your sole name and hence any net rental income is taxable on you. If however the property is owned jointly with your wife, any income arising will be split between you and your wife (usually this would be split 50:50) and taxed on you both individually.

You don’t say whether the rent received of £1,100 is gross (before deduction of allowable expenses) or net (after deduction of allowable expenses).

Any expenses of a revenue nature incurred in relation to letting your property may be deductible from your gross rents received before arriving at your taxable rental income.

Some examples of deductible expenses are as follows, although these are by no means a complete list:

1. Mortgage interest
2. Repairs and maintenance
3. Services charges
4. Estate agent (management) fees
5. Electricity/gas/water/council tax where paid on behalf of the tenant
6. Property and contents insurance

If you incur allowable expenditure which exceeds the rents you receive, you will not have any income tax to pay. In fact, the letting of your property will give rise to an annual loss which can be carried forward and offset against profits that may arise in future years

Whilst you provide details of your own and your wife’s joint income, where the property is in your sole name it is only your income which will affect the tax rate payable on your rental income.

By way of example, say the property is owned in your name solely, your only other income is employment income of £25,000 per annum and your taxable rental profits (after deduction of expenses) are £1,100 per month (£13,200 per year), you would be a lower rate tax payer and tax of approximately 20% will be payable in respect of your rental profits. You may wish therefore to consider setting this amount aside to ensure that you have sufficient funds to pay your tax bill. If your income levels are higher, you may be a higher rate tax payer and your effective rate of tax may be more than 20%.

Knotty CGT problem


My wife and I bought our house in London in 1996 for £56k. We paid off the mortgage and owned the house outright. We left the London house in August 2004 to rent and live in a house in Scotland. Between August 2004 and the end of December 2007 we let the house privately. Since then the house has been vacant, and after renovation, has been for sale since March 2008. In August 2005 we bought a house in Scotland outright, which we financed by a let-to-buy remortgage on the London house, and a family loan. We can't sell the house presently without lowering the price to an unacceptable figure to us. It's on the market for £400k.

What I would like to know is what our CGT liability is on the house if we sell it in 2008, and by what factor this liability will increase if we keep it and sell in say June 2009, 2010, 2011 or 2012.

TP writes: Where a property has not been owner-occupied throughout the period of ownership, part of the gain arising on disposal will be chargeable to tax and part of the gain will be exempt under the principal private residence (PPR) rules. This is subject to certain periods of absence being treated as ‘deemed’ periods of occupation and additional relief given for periods of letting.

By June 2009 you will have owned the property for roughly 13 years. Because you lived in the house as your main residence between 1996 and August 2004 (say 8 years), this period of actual occupation will qualify for exemption, as will the last three years of ownership regardless of what purpose the house is used for during this period. On disposal the capital gain will be apportioned over the total period of ownership and the proportion that relates to your owner occupation, i.e. 11 years out of the total will be exempt from CGT under current rules.

The remaining proportion of the capital gain will qualify for letting exemption but this will be restricted to the lower of:

i. the gain arising during the letting period;
ii. the gain treated as exempt under the main residence rules; and
iii. £80,000 (£40,000 each as the property is jointly owned).

Based on a sale price of £400,000 if the property were sold in June 2009 or 2010, the whole of the gain should be exempt. If the property were sold in 2011 or 2012 then part of the gain would not be exempt, approximately £12,000 and £32,000 respectively. However if you and your wife have your annual capital gains allowances available (currently £9,600 each – unless you are not domiciled in the UK and are claiming the remittance basis, in which case £0) then only the balance of the gain above these amounts would be subject to tax. The tax rate on capital gains is currently 18%. So in summary if you sell for £400,000 there is likely to be minimal CGT payable, if any. If you sell for more than this figure then the position will be different and you should seek further help at that time.

You mention that the property was renovated after the tenants moved out and it is possible that some of these costs can be deducted from the capital gain.

Loss making company

I currently own a rented property that is making a loss of about £200 pounds per month. I also have an expensive hobby (flying) and I was wondering if I could set up a small company as a loss making concern in order to offset tax and profits from another small company (profit making) that I own?

TP writes: As things stand, you get no tax relief for the costs of your hobby and no tax relief for the rental property losses. Relief for the property losses may be obtained in the future, as losses can be carried forward, but this will only be of value if the property letting starts to make a profit.

As a general rule for individuals and companies it is not possible to get tax relief for losses arising from an activity unless it is carried on with a view to making a profit. It would be unusual for a hobby to be carried on with the aim of making a profit and so it is highly unlikely that you would be able to offset the costs of flying against your other personal income.

Claiming that the flying is part of your company’s business is not likely to get off the ground, if you will excuse the pun. The taxman would not allow the costs to be offset against the company’s profits unless this part of the company’s “business” is being carried on with a view to making a profit. Furthermore you could personally end up being taxed on the amounts paid out by the company under the benefit in kind rules.

It is possible for losses in one company to be offset against the profits of the other but the rules are complicated and this only applies where one company owns the other. Having two companies involves additional administration.

If should also be noted that companies pay capital gains tax at a higher rate than paid by individuals .individuals. Companies do attract certain allowances that could mitigate the difference in the tax rate, but it should also be noted that companies do not get an annual capital gains tax free allowance, currently £9,600 for individuals. Also having sold the property and paid the tax due from the company, there would be further tax charges on you personally if you wished to withdraw the proceeds from the company. This would increase the tax rate compared to what you would pay if you held the property personally.

So overall, I do not believe you will achieve your intended aim and by using a company arrangement you could actually end up increasing your tax bill. You would certainly increase your administration time/costs and I have not even mentioned the issues of getting the rental property into company ownership!

Allowable interest

I own my house outright - no loan outstanding. I have to relocate to another town so I have 'bought' a house there on an interest-only mortgage with the intention of selling my original house and paying a large sum off the new mortgage. However, as you may have guessed I have not sold my original house and now I have to move to the new one. I will be letting my original house.

My problem relates to landlords' tax allowances. I understand that if I was letting a property I could claim any interest outstanding on a loan as a tax allowance. Since I don't have a loan on the property I will let, should I release some of the equity in that house and pay it off the new house so that I can claim the interest payable on the loan on the house which is to be let? Sorry if that sounds confusing.

I thought it would be more tax-efficient to do that than pay tax on the rent received.

Is that right?

1st scenario: I will have a large loan on the new house paying interest only until my own house sells when I can then pay off a large sum and have smaller loan. No renting/letting involved

2nd scenario: I let owned house and pay tax on the rental income.

3rd scenario: I release equity on owned house, say 90% of value, to pay towards new house loan, thus reducing the interest paid. I then 'let' original house and am able to claim tax relief on rental income.

Does that make sense? Would that work?

TP writes: Generally to obtain tax relief for loan interest, the proceeds of the loan have to be used for the letting business. However, when an existing property is first introduced into a letting business the tax rules allow the property to be refinanced and tax relief to be obtained even if the proceeds of the loan are not used for the letting business. The key point being that the loan is taken out on the property that is going to be let.

As you did not expect to be letting your old house it made sense at the time to secure the loan to buy the second house on that second property. If the first property is now let you will not be able to reduce the taxable rental income profit by offsetting any of the mortgage interest as the mortgage does not relate to the let property. All is not lost however and your third scenario should be successful. Releasing the equity from the let property does not have to be done at commencement of the letting, it can be done later, although you would of course only be eligible for tax relief on the loan from that date and it should be noted that tax relief is only available on borrowings up to the value of the property when the letting started.

Of course tax relief is only one factor you should consider before proceeding. Redemption penalties on the existing mortgage and comparison of the interest rates between the current and new loans need to be considered. You should also consider future redemption penalties should the housing market improve and the rental property be sold.

Joint buy to let property

I hold a third ownership of two buy to let houses in London. Both properties are rented out by individual rooms. With the first property the rental income covers the monthly mortgage repayment and other expenses with about £5,000 profit left per year. The second property incurs a loss of about £1,000 per year.

I now also have a residential mortgage on a house under my name and I live there with my wife.

What are my tax requirements?

TP writes: As a joint owner of a buy to let property you are taxable on your share of the rental profits for the tax year. Where there are two or more properties, as in this case, your share of the profit and losses from each property areshare of the profit and losses from each property is pooled to arrive at an overall profit or loss for the year. Based on the figures you provide it would seem that the overall result for the year is a profit of £4,000 of which one third belongs to you.

Where the overall result is a rental loss, this loss can be carried forward and offset against the first available rental profits. Where the overall result is a profit, the profit is added to your other income for the purpose of calculating your overall income tax bill for the year.

You mention that the profit of £5,000 takes account of the monthly mortgage repayments. Whilst it is not clear whether the mortgage is interest only or a repayment mortgage it should be noted that, for tax purposes, it is only the mortgage interest that is taken into account to calculate the rental profit or loss.

For further information contact:
Geoff Everett, tax director, Smith & Williamson
Tel 020 8492 8600
geoff.everett@smith.williamson.co.uk

Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

Note to editors
Smith & Williamson is an independent professional and financial services group employing over 1,500 people. The group is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices and mid-to-large corporates. The group operates from offices in London, Belfast, Birmingham, Bristol, Dublin, Glasgow, Guildford, Maidstone, North London, Salisbury, Southampton, and Worcester.

Smith & Williamson Limited
Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International, a worldwide network of independent accounting firms.

Relocation

My partner and I both own our properties outright. He now has a new job which will involve a relocation and we have agreed to rent a property in this new location until he's sure the job is going to work out. I'm running a limited company and can work from the new location. We are looking into renting out the two houses whilst renting in the new location, but are unsure of the best way to do this.

Can we take out buy to let interest only mortgages on both properties and invest the equity elsewhere – for example in a high interest savings account until we are ready to buy? Is this allowed or does the money have to be invested in another property?

Or would it be better from a tax perspective to just pay top rate tax on all the rental income (minus allowable expenses)?

TP writes: Generally to obtain tax relief for loan interest, the proceeds of the loan have to be used for the letting business. However, when an existing property is first introduced into a letting business the tax rules allow the property to be refinanced and tax relief to be obtained even if the proceeds of the loan are not used for the letting business.

In practice what this means is that if you begin letting the two properties, you can release the current equity in the properties by means of buy to let mortgages and obtain tax relief on the interest. This will be the case whatever you use the funds from the new loans for and therefore it would be possible to invest them in a high interest savings account whilst you are looking for a property for yourselves. However, releasing the equity from the existing properties does not have to be done at commencement of the letting, it can be done later. The only limitation being that tax relief is only available on borrowings up to the value of the property when the letting started.

As to whether it will be beneficial from a tax perspective to borrow now and invest the funds in savings account will depend on the interest rates. However, your decision should not be based solely on the tax position, especially so in these times of uncertainty. You should also consider the administrative burden of making the arrangements and also the potential for early redemption penalties if your initial intentions ultimately change, for whatever reason.

Sale of property

My mother had a lifetime tenancy in a house that my two sisters and I technically owned. She wanted to sell the home and move into a Senior Apartment. She gave up her rights and we sold the home for well below market value. All of the money went to my mother. My question is, how do my sisters and I handle this on our income tax filings? The home sold for less than £50k.

TP writes: The answer to your question will depend on what you mean by “technically owned”. Was this, for example, an arrangement created on someone’s death where your mother had use of the property for her life and you and your sisters would be entitled to it after her death?

If it was this sort of arrangement then your mother occupied the property under the terms of a trust and, assuming it was her main residence, any gain made on the sale should be exempt from capital gains tax.

The trust is regarded as a 'person' for tax purposes separate from you and your sisters and should complete its own tax return to report the sale. If you have not done a trust tax return before you will need to contact H M Revenue & Customs to ask them to send you the appropriate return form.

You say that all the money went to your mother. If the house was owned by a trust you should take professional advice on this as there may be further tax implications.

If you and your sisters owned the house personally and simply allowed your mother to live there, as owners each of you will have to report your share of any capital gain on your personal tax return and will be liable to capital gains tax on that share.

Your capital gain is calculated by deducting the 'allowable base cost' from the net proceeds of sale and apportioning the resultant amount in accordance with the fraction of the property which you each own (presumably one third)? The base cost of the property will be either the acquisition cost if it was purchased by you and your sisters, or if it was inherited, the market value at the date of death.

If the sale was made before 5 April 2008, you may be able to reduce the gain by indexation allowance or taper relief, depending on how long you owned the property. Neither of these reliefs is available for sales after 5 April 2008.

You mentioned that the house was sold at an undervalue. If the sale was to a connected person (essentially a family member), you will have to substitute open market value for the sale proceeds when you prepare the CGT calculation, whether for a trust return or for your personal returns.

Whether or not your capital gains will need to be reported on your 2007/08 tax return depends on the amount of the gain on your share and possibly, the extent to which you have realised other capital gains during the year. For the tax year 2007/08, you have an annual exemption of £9,200 and in so far as your net capital gains do not exceed this amount, there is no requirement for the gains to be reported to HMRC, unless the total proceeds from all chargeable disposals exceed the reporting limit of £36,800.

If the house was owned by you and your sisters personally rather than by a trust, one further point to consider is that an element of main residence relief might be available if your mother first occupied the property before 6 April 1988 and was, at the time, a ‘dependent relative’. Professional advice should be sought if you consider that this point may be relevant.

Declaring income

I have recently purchased a two bed flat and let it out straight away. Originally I was going to move in myself but when it was completed I decided to stay where I was living and let it out.

The rental is about £75 more than the interest-only mortgage, but with the maintenance I have to pay it works out that the rent is £5 per month less than my outgoings.

Do I have to let anyone know about this?

Also I have a property in the Algarve that I occasionally let to my friends and family at a small cost. Do I have to declare this? I have a mortgage in Portugal that I have had for four years which is costing me £10,800 per annum and I don't get anywhere near that back.

What is the best way to deal with this and what is the best for me in terms of getting any money back from the Inland Revenue?

TP writes: Whilst you have established that the letting of the two bed flat gives rise to a small loss, you have only advised that the property in the Algarve is let ‘at a small cost’. Whether or not this letting will give rise to a profit or a loss, will depend on the expenses which can be claimed and in this respect, you should be mindful of the fact that only the proportion of your annual costs which relate to the period during which the property is ‘available for letting’, can be claimed as a deduction for tax purposes.

If you are able to establish that a loss does also arise on the Algarve property, you will not be required to notify HMRC of the fact that you have commenced letting properties. The Self Assessment Legal Framework Manual advises that exceptions to the requirement to notify chargeability to tax include instances where ‘the taxpayer has no net liability to income tax for the year’.

In these circumstances you should keep and retain annual records of income and expenditure to support the fact that there are no profits and also so that in the event of the lettings giving rise to future profits, you are able to claim relief for the losses brought forward. Separate records should be kept for each of the properties as losses from UK lettings can only be offset against profits arising from other UK lettings, whilst losses from overseas lettings can only be offset against profits arising from other overseas lettings.

If you are unable to establish that a loss arises on the Algarve property, you will be required to notify HMRC of your chargeability to tax and this should be done by 5 October following the end of the tax year in which the profit arises. The Tax Return, together with any tax due, must be completed by 31January 2009 for the current tax year ending 5 April 2008.

First time buyer wishing to let out property

I purchased my first and only property, an apartment, for £150k in September 2007.

I have £135k left on the mortgage which is interest only, but marginally overpay each month towards the capital. The interest stands at £575 per month.

I will be moving cities for a new job and wish to let this property for £600 per month (minus 11.75% management fees) which gives me a return of £529.50 per month.

I'm a higher rate tax payer; do I get away without paying any tax as the rental income is less than the mortgage interest?

TP writes: As you incur allowable expenditure which exceeds the rents you receive, you will not have any income tax to pay. In fact, the letting of your property will give rise to an annual loss which can be carried forward and offset against profits that may arise in future years.

If you already submit Self Assessment Tax Returns to HMRC, you should request supplementary ‘Land and Property’ pages in order that you can declare details of your annual letting income and expenditure.

If you do not currently submit Self Assessment Tax Returns, you will not be required to notify HMRC of your chargeability to tax until such time as the letting gives rise to a profit.

Self assessment for non-resident

We recently left the UK to work overseas (Spain, we do not have property here and do not hold permanent residence) and will be gone for a year or so. We have a number of buy to let properties in the UK, currently making us a small loss, but all accounted for correctly each year under self-assessment. I'm presuming that we still account for the properties under UK self-assessment as normal? Is that correct?

TP writes: It is difficult to determine from the question whether or not your absence abroad will be of sufficient substance/duration for you to be treated as not resident in the UK, although generally if you leave the UK to for employment which is both full time and expected to last for at least one whole tax year, you will generally be considered non-resident.

However, whether you are resident or not, as the properties are in the UK you remain within the scope of UK tax on any rental profits. You should also note that if you are actually non-resident any profits you make on properties sold whilst abroad will be taxed in the year you return unless you are non-resident for five whole tax years or those properties where acquired after you became non-resident.

Furthermore because your ‘usual place of abode’ will be outside the UK for a period of six months or more, you will also be categorised as a non-resident landlord and as such, your letting agent or tenant will be required to deduct basic rate tax from rental income (net of certain deductible expenses) prior to you receiving it.

If you wish to continue receiving UK rental income gross whilst you are in Spain, you should submit Form NRL1 to the HMRC Centre for Non-Residents. HMRC will then grant approval for rents to be received gross. You rental profits will still remain taxable in the UK but this will help with cash-flow. .

You should also confirm your tax reporting requirements in Spain with a Spanish tax adviser.

TP writes: Although most works to existing dwellings are liable to VAT at the standard-rate (currently 17.5%), provided certain conditions are satisfied, a reduced rate of VAT of 5% applies to work carried out in connection with the conversion of buildings from commercial use to residential dwellings. The 5% reduced rate covers building services and qualifying building materials provided by the same builder in conjunction with those services. Therefore, it would seem possible that your contractor should have charged 5% VAT, not 17.5%, on most services and qualifying materials that he supplied in connection with the conversion. VAT would have been chargeable at 17.5% on any building materials that you purchased yourself from retailers or builders' merchants.

If you carried out the conversion with the intention of living in the property yourselves (i.e. you did not convert the building simply with a view to selling or letting it) VAT may have been recovered under the 'DIY' builders scheme. This is a special VAT refund scheme that allows DIY builders and converters to claim a refund of VAT incurred on their main construction or conversion costs - including VAT charged by a contractor and VAT incurred on any qualifying materials purchased yourself. Certain conditions must be satisfied for this scheme to be used and there are rules as to what VAT is / is not recoverable. There are, however, two main issues that need to be pointed out in your case.

Firstly, only VAT that has been correctly charged can be reclaimed under the scheme. As noted above, it is possible your contractor has charged too much VAT. Secondly, the completed claim form (with supporting evidence) must be sent to HM Revenue & Customs (HMRC) no later than three months after completion of the construction or conversion. As your residential conversion was carried out 18 months ago, you obviously fall outside the three month time limit allowed by law. If there is a genuine reason for the delay, HMRC may agree to refund the VAT if you write to them explaining the situation. However, HMRC are highly unlikely to consider ignorance of the DIY scheme to be a genuine reason.

Although you may be too late to apply for a VAT refund under the DIY scheme I would recommend that you contact your builder as soon as possible and request a refund of the 12.5% VAT that you were overcharged as the onus is on him to charge the correct amount of VAT on the goods/services he supplies. The contractor can correct the amount of VAT charged as long as it is within three years.

VAT and construction is a complex area and at 17.5%, mistakes can be costly. Therefore, it is always advisable to obtain advice from an accountant or tax adviser prior to embarking on a building project.

We have applied for and received council tax exemption on our new house whilst it being worked. Meanwhile we have started paying council tax on the flat and have been using it as our correspondence address for bills and the like.

Friends of ours have expressed an interest in buying the flat once we are able to move back to our house – which is likely to be in January or February 2008.

Having agreed to the sale we are currently considering an immediate exchange with an extended completion date of sometime in early 2008.

Can you please advise me on whether we would qualify for the 36 month permanent residential relief (and or any others) on the investment property if we sell it in five or six months time? Will the early exchange cause us any CGT issues?

TP writes: The last three years of ownership of a property that has been your main residence is considered to be a period of owner occupation, qualifying for exemption even if the property is let in that period. Therefore if the property is sold within 15 months of you moving out, any gain arising will be exempt from CGT.

A married couple can only have one property that qualifies as their main residence.

However you have advised that you had two residences available from August 2007 and it is therefore possible to elect which of those residences is to be treated as your main residence for CGT purposes. An election has to be made within two years of there being two residences and you therefore have until August 2009 to make this.

When a property which has been an actual or elected main residence at some time during the period of ownership is sold, the capital gain is apportioned over the period of ownership between those periods where the property was the main residence (not taxable) and those periods when it was not. The effect of making this election in favour of the investment property is that the last 36 months of ownership is treated as an exempt period.

Assuming you enter into an immediate exchange, you will have owned the property for 42 months, therefore 36/42nd of the capital gain will be exempt. Furthermore, there is an additional exemption which applies where a property has been both let and has been your main residence which may exempt some or all of the remaining gain up to a maximum of £40,000.

It is also possible that you may want to vary the election once it has been made as for the period that the investment property is your elected main residence your main house ceases to be exempt. The effect on your main house may be negligible and may not actually give rise to a tax charge; however I would suggest you seek professional advice to ensure that the elections are made in the most beneficial way.

An early exchange should not cause you any CGT issues; however you should be aware that it is the date of exchange that is the sale date for capital gains tax even if the completion is some months later. The gain would therefore fall into the current tax year even though completion may take place after 5 April 2008.

Myself and my husband both work full time and there is not an income received from the rental as it all goes out in interest payments/insurance. Do we need to do annual accounts?

TP writes: The fact that you have rented out your properties on assured tenancy agreements does not affect the expenses that you can claim against your letting income.

The expenses you can deduct from letting income include:
· letting agent's fees
· legal fees for lets of a year or less, or for renewing a lease for less than 50 years
· accountant's fees
· buildings and contents insurance
· interest on property loans
· maintenance and repairs (but not improvements)
· utility bills (like gas, water, electricity)
· rent, ground rent, service charges
· council tax
· services you pay for, like cleaning or gardening
· other direct costs of letting the property, like phone calls, stationery, advertising.

You should bear in mind that you can only claim expenses that are solely for running your property letting business. If the expense is only partly for running your then you may only be able to claim part of it.

I note that both you and your husband work full time but you have not stated whether you are required to file a tax return. If you are, then you will need to include your half share of the income and expenses on the Land & Property pages of each of your tax returns even though you do not make a profit. If you do not already file a tax return you will need to do so in future and should notify your tax office of your changed circumstances. If your total income in the year from the letting is less than £15,000 (before you've taken off expenses) you can include the total expenses on your tax return; if it's £15,000 or over you will need to provide a breakdown.

If the expenses exceed the income, the excess (loss) will be carried forward until future profits.

Live in landlord

I am about to purchase a three bed flat to live in personally, with the intention of renting out the other two rooms. My mortgage adviser knows all of this and it has been factored in.

My question is, given that two of the rooms will be let out and I will be drawing an income from their rent, to what extent can I offset that with the cost of the interest I am paying on the mortgage and the costs of buying the property (in the first year)?

Also, I want to try and avoid capital gains tax if possible. Given that this will be my only residence can I completely avoid it or if I claim the tax relief from the interest will this invalidate my protection?

TP writes: When you let furnished rooms in your own home, e.g. a spare bedroom, you may wish to consider being taxed under the ‘rent-a-room’ relief rules. Rent-a-room relief allows you to receive total rents (including contributions towards running costs) of up to £4,250 per year tax-free. If the total receipts from letting rooms in your own home do not exceed £4,250 then you will be exempt from tax and you all you need do is tick the relevant box on your tax return to claim the relief.

If your total receipts exceed £4,250 you can choose between:
paying tax on the excess above £4,250 without any deduction for allowable expenses, or
pay tax on the profit from the letting calculated in the normal way i.e. gross rents less allowable expenses.

If your receipts are greater that £4,250 you will need to decide which method is best for you and complete your tax return accordingly.

If you choose not to claim rent–a-room relief then you can claim a proportion of the mortgage interest paid. The interest charged on the loan on your property will need to be split between the rental business use and the private or non-business use. The split is done in whatever way produces a fair and reasonable business deduction, but if there are say five rooms in the house (excluding bathroom and kitchen) then a fair split would be 2/5 of the interest paid to offset against the rental income.

The costs of buying the property are a capital expense and cannot be offset against the letting income. You can however claim these when calculating any gain on the sale of the property.

Capital gains tax exemption for your own home ‘principal private residence relief’ (PPR) is not restricted when you have just one lodger living with you. This is so whether you opt to be taxed under the rent-a-room scheme or on the traditional basis and claim relief for interest. However if there are two or more lodgers or the letting amounts to more of a business venture, e.g. a lodging house where additional laundry and other services are provided, PPR relief may be restricted, although you may then qualify for the PPR lettings relief.

It appears that your position may get rather complicated and I therefore suggest you seek professional advice to ensure that the capital gain arising is correctly reported to HM Revenue & Customs.

TP writes: Generally the expenses you incur for the rental business before the letting starts are allowable provided they are not capital in nature, are incurred in the period of seven years before the start of the letting and would be allowed as a deduction if they had been incurred after the letting had started.

The cost of rewiring or any other repairs undertaken by the electrician would normally be deductible against the rental income that you will receive. It does not appear that any of the work carried out was of a capital nature (improvement to the property) however if they were, you should get a separate invoice for those works, otherwise you could end up involved in arguing the split between the cost of the repairs, which are income tax deductible and the capital element, which would only be deductible from any capital gain realised on the property on its sale.

I made a joint declaration of beneficial ownership of a flat in which I owned 100 per cent of the property even though the mortgage was in joint names. I sold the flat when I was for tax purposes non resident in the UK, although my wife was resident at the time of the sale.

My wife did not declare the proceeds of the sale and, following a protracted investigation by the Revenue, she has been told she is liable to CGT on 50 per cent of the gain on the property.

My accountant has told me that any election I made in respect of beneficial ownership would in reality only relate to income from lettings and not the capital gains on any later sale.

Is this correct?

TP writes: Unless a joint declaration is made, income from property held in the joint names of a husband and wife (or civil partners), will be split equally between them, regardless of their actual entitlement to the asset.

A joint declaration of actual beneficial interests can be made if their entitlement to the asset and its income is unequal and this results in the income being assessed on each spouse according to their actual share, rather than on an equal share. However, if such a declaration is made, it must show the actual split of the beneficial interests and can only be made if the split of interests in the capital of the asset is the same as the split of interests in the income of the asset. Therefore, if no declaration had been made you would have each been assessed on 50 per cent of the income, whilst a joint declaration would have had no effect as it would only have entitled you to elect for the income to be assessed based on the actual split of the beneficial interests, again 50 per cent.

Essentially, your share of the property for income tax purposes can be determined by reference to your capital share in the asset but conversely, your capital share in the asset is entirely independent of the income tax treatment.

Also, I am in the process of selling a property bought in 1992, lived in for two years between 1998 and 2000 when worked elsewhere (but still travelled back at weekends).

In 2002 I let this property (with some voids, until 2006. It has been empty for last 12 months. I am not sure if capital gains will be owing. The Revenue said it could not advise, would only make a calculation once the property had been sold.

TP writes: Where you have more than one factual residence, it is possible to elect for any of them to be your Principal Place of Residence (PPR). However, such an election must be made by notice to HMRC within two years of acquiring a second or subsequent residence. If you have made any formal elections in the past, then the tax office responsible for dealing with your general tax affairs will be the best place to start in attempting to locate copies.

If you have not made any formal elections, HMRC will not have any record of ‘nominated properties’ and under Self Assessment, it will be for you to determine which property constitutes your PPR for any given period and this should be determined by reference to the facts in each case. HMRC would then have the opportunity to challenge your view via the enquiry process.

On the assumption that no formal elections have been made, the property you are in the process of selling will be determined by reference to the facts, to be your PPR during the period in which it was occupied between 1998 and 2000 and as such, the property will qualify for the associated PPR reliefs. The period of actual occupation will qualify for exemption from CGT, as will the last three years of ownership regardless of what purpose the property is used for during this period.

In addition, the period during which the property was let (to the extent that this does not overlap with the deemed period of occupation in the last three years of ownership), will qualify for letting exemption relief, although this will be restricted to the lower of:

i. the gain arising during the letting period;
ii. the gain treated as exempt under the main residence rules; and
iii. £40,000.

If you have acquired any properties which constitute a factual residence within the last two years or intend to in the future, you should obtain professional advice in order to determine if an election should be made to ensure you take full advantage of the potential to minimise any future CGT liability.

I have now been offered £360,000 for the flat, and have no idea whether I am liable for CGT (as in my head it is my home but I just have not been able to live in it), and if so I have no concept of what sums of money this might amount to. Can you advise?

TP writes: Whilst you have always considered the flat to be your home, for capital gains tax purposes, where a property has not been owner-occupied throughout the period of ownership, part of the gain arising on disposal will be chargeable to tax and part of the gain will be exempt under the principal private residence (PPR) rules. This is subject to certain periods of absence being treated as ‘deemed’ periods of occupation and additional relief given for periods of letting.

Because you lived in the flat as your main residence for a two year period from 1995, this period of actual occupation will qualify for exemption, as will the last three years of ownership regardless of what purpose the flat is used for during this period. Furthermore, the PPR rules allow any period of absence up to a total of three years to be treated as a further deemed period of occupation, if the period in question is both preceded and followed by an actual period of occupation. I assume that you re-occupied the property at some stage between 2000 and 2003 and therefore, the three year period between 1998 and 2000 may also be eligible for PPR relief.

The remaining interim period during which the property was let, will qualify for letting exemption but this will be restricted to the lower of:
i. the gain arising during the letting period;
ii. the gain treated as exempt under the main residence rules; and
iii. £40,000.
Using the figures which you have supplied and assuming purchase and sale dates of January 1995 and December 2007 respectively (giving an ownership period of 13 years), 8/13 of the net gain of £279,000 will qualify for PPR relief, with the remaining gain of £107,308 qualifying for letting relief of £40,000.

This advice has been given on the assumption that you have not owned another property during the period since the flat was acquired.

I have just replaced a carpet in one of the bedrooms so can I claim the full cost of that? I have also recently had a tenant do a midnight flit on me, stealing a washing machine and a fridge freezer I had left in the property. Is there anything I can clam for these?

Afterwards I had to fit new locks and pay for a skip to get rid of stuff that was left. Are the costs of this allowable? Subsequently my property was empty for a couple of months so I had to pay the mortgage and I am presuming that I can still claim the interest part of my mortgage even though I wasn't receiving any rent. Also can I claim for going to the property to collect the rent? If so what is the mileage rate? Is the cost of the gas safety certificate claimable and any repairs that are needed?

TP writes: A fully furnished property is defined by HMRC as one that is ‘capable of normal occupation without the tenant having to provide their own beds, chairs, tables, sofas and other furnishings, cooker etc.’

As these requirements are only satisfied in part, the 10% wear and tear allowance is not available and you will need to claim relief for furnishings using the alternative ‘renewals’ basis, under which tax relief is available for expenditure on the cost of replacing items which the wear and tear allowance is designed to cover.

This, will of course, allow you to claim a deduction for the cost of the replacement carpet, together with any expenditure incurred in replacing the stolen washing machine and fridge freezer, although any insurance proceeds received in respect of the latter must be included as income of the relevant year.

The cost of making good the property following the departure of your tenant will qualify as allowable repairs and maintenance expenditure, as will the cost of obtaining the gas safety certificate.

As the vacant period was both preceded and followed by a period of letting, the mortgage interest payments, insurance payments and other payments of a similar nature will constitute deductible expenses as they were incurred wholly and exclusively for the purposes of your letting business.

Deductions for travelling expenses also depend mainly on the wholly and exclusively rule. HMRC advises that revenue costs of travelling between different properties solely for the purposes of the rental business are an allowable deduction but the cost of travelling from home to the let property and back will only be allowable if the purpose in making the journey is exclusively a business one.

Travelling expenses will not be deductible if the purpose in making the journey is partly private and, for example, includes a visit to the shops to buy weekly groceries. But a landlord can still have a deduction for a journey made solely for business purposes if any personal benefit they get is only incidental; for example, where they happen to stop on the way to pick up a newspaper.

Relief for car expenses can either be claimed using the statutory rates afforded to employees using their own car for business purposes (currently 40p per mile for the first 10,000 miles and 25p thereafter), or by splitting the annual running costs on a mileage basis between business and private journeys. In this instance, you would claim a deduction for the relevant percentage of the total running costs while plant and machinery capital allowances would provide relief for the depreciation of the capital value of your car.

TP writes:
If the proceeds of a loan are used for the purpose of an investment property, the interest payments will generally qualify for tax relief. The fact that the loan may be secured on another asset, such as your home, does not change the tax treatment. Therefore, the increased interest charges from re-mortgaging your home to release funds to purchase a buy to let will be allowable as a deduction against rental income.

TP writes:
Generally to obtain tax relief for loan interest, the proceeds of the loan have to be used for the letting business, for example, buying or improving the rental property. However, when an existing property is first introduced into a letting business the tax rules allow the property to be refinanced and tax relief to be obtained even if the proceeds of the loan are not used for the letting business. This may seem strange but these are rules and this is confirmed by HM Revenue & Customs in their Business Income manual which can be found in the ‘practitioner zone’ of their website.

In practice what this means is that if you move out of your home and start letting it, you can claim tax relief going forward on any existing loan you have outstanding on the property and, in addition, you can release the current equity in the property by means of a further loan and obtain tax relief on the interest. This is so whatever you use the new loan for. Therefore in this instance, interest relief will be available on the £26,000 released from the former home and relief would also be available on the £230,000 mortgage if that loan is secured on the rental property. If the loan is secured on the new property, no relief will be due and if this is the case, consideration could be given to rearranging the loan. There will of course involve fees and may not be possible if there are redemption penalties. One must also consider the interest rates available as whilst tax relief is attractive, one should always firstly consider the economics of the situation.

Sounds like option 1 is the best from a financial point. Am I missing something?

Secondly, if we did rent the property, could the renting be put in my partner’s name as she pays a lower tax band than myself? Would it make any difference?


TP writes:
I will explain each option as follows:

Option 1
If the property is sold and the property has been your private residence throughout the period of ownership no capital gains tax liability will arise as any gain will be covered by the principal private residence relief. Additionally the last three years of ownership of a property that has been your main residence is considered to be a period of owner occupation qualifying for exemption even if the property is let in that period.

Option 2
By retaining and renting the property income tax will arise should a ‘rental profit’ be made during the relevant tax year.

Rental profits are calculated by deducting expenses you may incur as a result of letting the property from the rental income received, for example:
- Agent’s fees
- Accountancy and legal fees
- Certain repairs and maintenance
- Cleaning and gardening
- Loan interest
- 10% wear and tear allowance (if let furnished).

Any rental profit made will be subject to income tax at your marginal tax rate. As your partner does not own part of the property it is not possible for the income to be declared on her tax return to avoid you having to pay higher rate income tax. If you wish to transfer the property into joint names then this will be a disposal of part of your interest in the property and potentially subject to capital gains tax unless you are married or in civil partnership, or unless the gain qualifies for exemption.

As mentioned for option 1, as the property as been your home, if should be exempt from capital gains tax so you could, if you wished, transfer a share in the property to your partner without a tax charge. However, this needs to be considered carefully if you plan to sell the property in the future as whilst your share of the gain will qualify for the various tax reliefs available, your partner will not because although she has lived in the house with you, she will not have lived in it at a time when she owned any part of it. Furthermore a Stamp Duty Land tax charge may arise on the transfer if your partner gives you consideration (e.g. pays you or takes on part of any mortgage) in return for receiving her share and that consideration exceeds the threshold of £125,000.

I had to install a replacement boiler to pass the safety inspections. From an earlier post I understand I cannot claim for this as this is seen as an 'improvement'. Is this still the case if the letting agent deducted the cost from the rent before forwarding the remaining balance to me?

The patio at the rear of the property is in a poor state of repair, some stones are damaged and part of it has 'slipped' and could be a hazard to the tenant. I am looking at re-laying the patio, possibly making it smaller, maybe adding a small wall. Is this also deemed to be an improvement or is it classed as maintenance and repair therefore subject to tax relief?

TP writes:
Determining whether expenditure qualifies as a deduction from income as a repair or as a deduction from capital gains as an improvement, often involves much deliberation. However, as a general rule of thumb, if the expenditure is incurred in making good dilapidations caused by the letting of the property, whether by way of repair or replacement to an equivalent modern standard, it should qualify as a deduction for income tax purposes and therefore be reported in your tax return. Conversely, expenditure which changes the property or significantly upgrades or improves the property, would generally be considered of a capital nature and tax relief would not be obtained until the eventual sale.

Taking this guidance at face value it would appear that an income tax deduction should be available for the cost of the new boiler on the grounds that presumably, the new asset is a like for like replacement of the existing one, to an equivalent modern standard. However, more specific guidance can often be taken from decisions made by the courts in tax cases and precedent set by one such case is likely to preclude the availability of income tax relief in respect of the cost of your replacement boiler. This particular decision found that the cost of ‘initial repairs’ which put an asset into a fit state for use in the business would not qualify for income tax relief. Essentially, as the property could not be let without upgrading the boiler (the safety inspection would have been failed), the cost is likely to be viewed by HMRC as a capital improvement. You should note that the cost of any future replacement boiler to an equivalent modern standard, will qualify for an income tax deduction.

With regard to the patio, it cannot be said that the property could not be let without making the necessary repairs and therefore an income tax relief claim for the cost of re-laying the patio should be successful. Obviously, the addition of a new wall or any similar change to improve or alter the asset would be deemed to qualify only as expenditure of a capital nature.

Finally, I would confirm that the fact that your letting agent has deducted expenditure from rents before remitting the balance to you, should never be taken as an indication that the relevant amount will qualify for a tax deduction.

Capital gains on partially let, jointly owned property

My brother and I are about to jointly purchase a three bedroom flat in London. My brother would live there and we would then rent out two rooms for around £850 per month combined rental income. I would continue to live in my girlfriend’s house and neither my brother or I have any interests in other property. From reading previous posts it seems that my brother would qualify for PPR on his 50 per cent share, while I would not. In two or three years time, if the capital value had appreciated from £250k to £300k, would my brother be exempt from his half of the profit (£25k), while I would only be able to offset any apportioned improvement costs – say £2k, and 0 per cent taper relief (less than three years) since ‘buy to let’ are classed as non-business assets? This would leave me with a chargeable gain of £23k? Should I consider moving in there at some point for a qualifying period to help reduce this liability?

We would probably not opt into the rent a room scheme since the mortgage interest (around £900) would be similar in size to the rental income and it is not clear if it applicable to more than one room.

TP writes:
I would begin by confirming that for income tax purposes, the rent a room scheme should not be a consideration due to the level of income which you anticipate receiving. Therefore, you will need to prepare annual accounts detailing all income and outgoings for the tax year in question and your 50 per cent share of any net profit will be charged to UK tax at your marginal rate.

For capital gains tax purposes, I will deal firstly with your brother’s situation and then with your own:

As the property will be your brother’s PPR, your assertion that his half share will be exempt from capital gains tax will be correct if it remains his PPR for the duration of his ownership period (excluding the final three years) and if the tenants occupying the two let rooms are in effect ‘lodgers who live with your brother as part of the same household’. If this were the case, your brother would not be treated as having given up the use of any part of the property. However, if the two tenants were to occupy self-contained parts of the property, the CGT treatment would change as those parts of the property would cease to be included as part of your brother’s PPR.

Your understanding of how you will be taxed on an eventual capital gain is correct, as is your assertion that the capital gain could be mitigated by moving into the property and treating it as your main residence for a given period. As you are currently staying in your girlfriend’s house, there would be no requirement for you to nominate the new property as your PPR, it would simply become your PPR at the date of your first occupation. In these circumstances, the final three years of your ownership period would automatically qualify as an exempt period for CGT purposes. In addition the remaining period would qualify for the lettings exemption which could exempt up to £40,000 of the remaining gain from tax.

Two years ago my wife’s mother transferred her property into my wife’s name (value then £390,000; value now £500,000 approx). This property, which currently has an £80,000 mortgage on it, has been let for the last 12 months. We are contemplating moving into my wife’s property and electing this as our principal residence for, say, six to 12 months whilst we let out our current home. We then intend to sell my wife’s house and move back into our current house, which we propose to sell as soon as possible afterwards.

Is this a viable way of avoiding or minimising any capital gain tax liability? Will my wife be liable for capital gains on the sale of her house? Will we then be liable for capital gains on the sale of our house?

TP writes:
Where a taxpayer has two residence available for his use, the question of which one is treated as the main residence for capital gains tax is determined on the facts. However, the taxpayer can put the matter beyond doubt by electing which of the two residences is to be the exempt one for tax purposes. The election has to be made within two years of an additional residence being available and can be back dated to that date. The property nominated does not have to be the one that is used the most, it just has to be available and used by the taxpayer.

For an election to be possible there must be two residences available to the taxpayer. Where two properties are owned but one is let, there is only one residence available to the owner and an election is not possible. Therefore whilst your wife’s property is let, you only have one residence available and if you subsequently move into that property and let your “principal” residence, you will still only have one residence available. Therefore there is no need to make an election and in fact, you cannot do so. If you do not let the “principal” residence then an election could be considered.

If you move into your wife’s house, occupy it for six to twelve months and then sell it, on sale the last the three years of ownership will be exempt from capital gains tax, which could effectively exempt the whole gain from tax if the period of ownership is no more than three years. As the property will have been both occupied and let you should qualify for the lettings exemption which would be relevant if the period of ownership exceeds three years and could potentially exempt any remaining gain.

Your house will continue to be your exempt residence until you move into your wife’s property. For the period you are living in your wife’s property it will not be exempt but whether there is subsequently any taxable gain when you eventually sell this property will depend on the amounts involved. Given that the property is jointly owned the gain attributable to the let period would have to exceed £80,000 (2 x the maximum lettings exemption) for there to be any taxable gain.

What I can't seem to find out is how I will be taxed on the rental income from the property. I will be taking a mortgage to finance the property.

I have heard that I will not have to pay tax on monies from the rental that equal the interest portion of my mortgage, is this true? Are there any other costs that I would be able to deduct from the rental income prior to paying tax?

Any information would be greatly received.

(Does it make) sense to remortgage the rental property prior to renting so that I could get tax relief on the mortgage interest payment?

TP writes:
The income tax treatment of rents received from property situated abroad is almost identical to the treatment afforded to rents received from UK property. The only distinguishing factors are that the income is reported on the ‘Foreign’ pages of the Self Assessment Tax Return rather than the ‘Land and Property’ pages and losses arising can only be offset against income received from other overseas property, rather than being aggregated with income from property situated in the UK.

Therefore and in accordance with the usual treatment of property income, you will need to prepare annual accounts detailing all income and outgoings for the tax year in question and any net profit will be charged to UK tax at your marginal rate (although any equivalent Spanish tax which you are required to pay will be deducted from the final tax bill).

You are correct that the outgoings will include any interest paid on the mortgage taken to finance the purchase of the property and as far as other deductions are concerned, you will need to consider all expenditure which is incurred in respect of the letting of the property, such as rates, electricity, gas, repairs etc. Furthermore, if the property is to be let fully furnished, you will be entitled to an annual ‘wear and tear allowance’, which provides a measure of relief for the depreciation of furniture, furnishings and electrical appliances within the property. This is calculated at 10% of the annual rents after the deduction of charges which would normally be borne by the tenant but are in fact borne by you (e.g. rates).

You mentioned that you may visit the property a couple of times a year and I would therefore advise that expenses incurred during any period when the property is ‘not available for letting’, will not be deductible for tax purposes. This will result in restrictions being made to numerous expenses on which tax relief is claimed, including the mortgage interest.

In response to your final question, from a tax perspective it would certainly make sense to maximise the borrowings taken against your Spanish property on the basis that income tax relief will be available. However, your decisions should be driven by commercial considerations of which the tax relief would be a factor.

Holiday lets abroad

With my girlfriend I am the joint owner of over 20 properties in Spain with approximately £60,000 equity in each. I plan to finish work in the UK and move to Spain for six months of the year, living in my UK property for the other six months. This will be let out for the remaining six months.

We plan to sell one Spanish property a year, living off the profit. But what tax liabilities does this plan entail, given that I will have no other source of income?

TP writes:
If it is your intention to live in Spain for six months every year, your absence from the UK will only ever be on a temporary basis and as a result, you will retain your UK resident status for both income tax and capital gains tax purposes. This means that you will remain liable to pay UK taxes on your worldwide income and gains even though you will also be liable to Spanish tax on the rental profit.

Therefore, you will need to report details to HMRC and account for income tax on the net profit emanating from the letting of your UK and Spanish properties, as well as any interest arising on funds received from the sale of your Spanish properties which are subsequently held on deposit. If the funds are held offshore, you will be able to claim relief for any foreign tax paid on the investment income and also tax paid in Spain on the rents.

You will also need to report details to HMRC and account for capital gains tax on the profits arising from the disposal of your Spanish properties.

One further point to note is that because your ‘usual place of abode’ will be outside the UK for a period of six months or more, you will be classified as a non-resident landlord. Therefore, if you wish to receive UK rental income gross, you should submit Form NRL1 to the HMRCs Centre for Non-Residents. HMRC will then grant approval for gross rents to be received. Otherwise, your letting agent or tenant will be required to deduct basic rate tax from rental income prior to you receiving it.

TP writes:
A fully furnished property is defined by HMRC as one that is ‘capable of normal occupation without the tenant having to provide their own beds, chairs, tables, sofas and other furnishings, cooker etc.’

As these requirements are only satisfied in part, the 10 per cent wear and tear allowance is not available and you will need to claim relief for furnishings using the alternative ‘renewals’ basis, under which tax relief is available for expenditure on the cost of replacing items which the wear and tear allowance is designed to cover. Alternatively, you could arrange for the remainder of the property to be furnished.

Unfortunately, there is no scope to claim the wear and tear allowance at a reduced, comparable rate.

We now want to sell the property and have discovered that we may have to pay capital gains on the sale as it is a business.

The gain we have made on the property is £300,000 over five years. The amount taken by the B&B has been minuscule. Will we have to pay capital gains tax? We thought we could just sell the property as an ordinary residential sale. We have lived here the whole time. The accountant never mentioned this aspect to us. He registered about 90 per cent of the house as B&B accommodation.

TP writes:
You will not be able to sell the property as an ordinary residential sale as an element of the gain clearly relates to non-residential use. However, you will not be required to treat 90 per cent of the gain as relating to your business, which on the face of it may be considered the correct approach. HMRCs own guidance on the subject states that any private use fraction agreed for the purposes of calculating your annual trading profit ‘provides a poor guide to the apportionment required’ and goes on to advise that while the kitchen of a small guest house may be used equally to provide meals for the resident owner and to provide meals for the guests, it forms part of the residence of the owner and as such, private residence relief will not be restricted.

It will therefore be for you to determine the proportion of your property which was used exclusively for business purposes during the period that you ran the bed and breakfast. The business proportion of the gain may qualify as a business asset for taper relief purposes and this will reduce any apportioned gain by 75 per cent.

Depending on the circumstances, you may also be eligible for some private residence lettings relief. This is based on a 1990 Court of Appeal case Owen v Elliott where the owners occupied an annex to a hotel in the summer months but during the winter also occupied vacant rooms in the main hotel. Relief was given on the grounds that the hotel was part of their residence. Your circumstances may not be the same as Mr & Mrs Owen and as this is a complex area of taxation I recommend that you seek professional advice.

Selling a buy to let

My wife and I moved to Switzerland in 1998. In the summer of 2001, whilst still abroad, we bought three buy to let properties. One was sold when we were still overseas. My wife returned to UK in August 2004 and moved into rented accommodation. I returned in May 2005 and moved into the same rented property. We now want to sell one property and buy a home. I understand that I qualify for taper relief, but want to mitigate the CGT liability. If I move into the property and live there for a couple of months can I claim it to be our PPR and get lettings relief? Do we both need to move in to claim the lettings relief. After taper relief and personal allowances I estimate the CGT liability to be about £25K. What about the two year rule – since I have not been back in this country for more than two years can I nominate one of the properties as a PPR?

TP writes:
If you and your wife were to move into the property which you are proposing to sell and ‘live there for a couple of months’, then assuming that your occupation is bona fide, the property would become your factual main residence and qualify for the PPR reliefs. As such, the final three years of your ownership period would qualify as an exempt period for CGT purposes and the remaining period of ownership, prior to the three years before sale, would qualify for the letting exemption.

If your wife did not move in with you and instead stayed in the rented property, you would have two factual residences and without an election, it would be for HMRC to decide which property constituted your PPR. As the legislation on this point is completely indifferent to ownership, to ensure that the chosen property qualifies as your PPR, you should make the appropriate election within two years of first occupying the property. Under these circumstances, the elected property will automatically qualify as the PPR of your wife and as such, she would be entitled to the same PPR exemptions, despite having never lived in the property.

Moving into rented accommodation does constitute an event that starts a new two year election period for PPR purposes. However, the only property which would have been occupied since your return to the UK is the rented accommodation and until you actually occupy a particular property it cannot be your PPR. Therefore the point raised about the two year rule is largely academic.

Also, I recently took out a £20,000 personal loan (over 10 years) to help my mother with a house purchase, but she no longer needs this. I could pay back the loan with no penalty, but since it’s a fixed rate I could use it to pay off my mortgage. However, if I did this, could I offset the loan costs against the rental income for tax?

If I did decide to remortgage, I understand there would be an advantage if the flat was placed jointly in my husband's and my names for capital gains tax? Is this the case?

TP writes:
You have been in receipt of rental income since 2002 and therefore you should have already notified HMRC of your chargeability to tax and submitted annual tax returns. You do not have the option to organise things so that you don't have to complete a tax return.

It is open to question whether you need to notify chargeability if your rental business does not realise a profit but this point is academic in your case, as it is evident from the figures provided that a profit would have been made. However, whether you have to pay tax on this profit and if so, how much, will depend on whether you have other income. You should therefore contact your tax office as soon as possible and advise them of the situation as interest will be accruing on any underpaid tax.

Essentially, a deduction for tax purposes is afforded to the interest element of any mortgage payments which relate to the let property. Therefore, the monthly payments of £115 which you currently make are an allowable deduction but if you were to overpay on the mortgage, no tax relief would be due as the payment would equate to a repayment of capital. You have the option to re-finance, although tax relief will only be available for interest paid on capital up to and including the value of the property at the time it was first let out in 2002. If you wish to maximise interest relief, you will need to obtain a valuation of the property at this date.

Because you lived in the flat as your main residence between 1989 and 2002, you will be entitled to principal private residence relief on the eventual sale. The period of occupation will qualify for complete exemption, as will the last three years of ownership regardless of what purpose the flat is used for during this period. The remaining period, during which the property was let, will also qualify for an exemption but this will be restricted to the lower of:
i. the gain arising during the letting period;
ii. the gain treated as exempt under the main residence rules; and
iii. £40,000.

If you were to transfer the property into joint names, your husband would not benefit from these reliefs, which together with the annual CGT exemption, are likely to extinguish any tax liability. For this reason, such a transfer should not be considered.

We’ve also been led to believe if we then sell the previous property we will have to pay 40 per cent tax on gains. Will this affect the equity taken to the new property in some way (for good or bad)?

TP writes:
It appears from the question that you intend to let the property you currently live in, which I assume is owned solely by your partner. If your partner remortgages the property, tax relief on the borrowing should be available up to the value of the property before it is first let. It does not matter if the additional borrowing is then used towards buying your new home. Conversely, no tax relief will be available for the mortgage taken out on your new house and therefore, you should ensure that the maximum possible amount of debt is retained in the property which is to be let.

If your partner is a higher rate taxpayer, tax will be payable at 40 per cent on the gain which ultimately arises on the sale of your current house. However, this will be after the deduction of the available CGT reliefs, taper relief and the annual CGT exemption which currently amount to £9,200.

The period during which your partner occupied the property as a main residence and the final three years of ownership (to the extent that it does not correspond with an actual period of occupation) will each qualify as exempt periods for CGT purposes. The remaining period, during which the property was let, will also qualify for an exemption but this will be restricted to the lower of:
i. the gain arising during the letting period;
ii. the gain treated as exempt under the main residence rules; and
iii. £40,000.

These reliefs may mean that your partner may not have to pay any tax on the eventual sale of the property.

I bought a property in October 2006 with a buy to let mortgage and currently rent it out. If I was to move into my property in the fourth year, would I be exempt from all CGT (adding in the fact that I have a buy to let mortgage) and if I would be exempt, how long would I need to live in the property for it to qualify as being my main residence? As in can I move in for four months and then sell up, being free of all CGT?

I have heard that by putting properties in joint names double the CGT allowance is possible - is this also true if the property was held in my brother’s name with me or does this rule only apply to married couples?

TP writes: I will deal with each of your questions in turn:

Moving into your let property:

If you were to move into your property in the fourth year, you would not automatically be exempt from all CGT, although it would be unlikely that a CGT liability would arise. The period during which you occupy the property as a main residence and the final three years of your ownership period (to the extent that it does not correspond with an actual period of occupation) would each qualify as exempt periods for CGT purposes. The remaining period, during which the property was let, will also qualify for an exemption but this will be restricted to the lower of:
i. the gain arising during the letting period;
ii. the gain treated as exempt under the main residence rules; and
iii. £40,000.

For the property to qualify as your main residence there is no specific period of time throughout which you must reside there. Indeed, the Revenue have always considered ‘quality’ of occupation rather than ‘quantity’ of occupation in determining whether a property is an individual’s main residence. To satisfy the ‘quality’ tests you would need to demonstrate that the usual steps which would be undertaken by somebody moving house had been followed. This would include redirecting mail, registering for voting purposes, registering with a new doctor etc.

Property in joint names:

Holding property in joint names and utilising two CGT allowances is not exclusive to married couples and would be available to you and your brother. If the property to which you refer is currently held by only one of you, the transfer of a half share would be deemed to be made at market value as you and your brother are ‘connected persons’ for tax purposes. The transfer itself would have CGT implications and would potentially have Stamp Duty Land Tax (SDLT) implications if your brother were to pay for his half share or if he were to take on part of the mortgage. The current threshold for SDLT is £120,000.

Rental income

In April 2008 I am planning to go travelling abroad for a year with my girlfriend, and I intend to rent out my three bed property (on which I have a £196,000 mortgage).

I see from a previous email you have answered that one can apply for an NRL1 from the HMRC in order to obtain rental income gross, although this is presumably simply to authorise the letting agents that the gross rental amount can be released . Since I plan to rent the property privately please can you let me know whether I still need to apply for and NRL1 before I leave, and then simply fill out a tax return in December 2009 when the income for that period needs to be submitted?

Am I right in assuming that I can earn £5,225 (or whatever the 2008/9 personal allowance is) in gross rental income as my personal allowance for the financial year, followed by deducting my mortgage interest from the remaining annual rental income, and then pay tax on the remainder at 10 per cent on the for the first £2,150 (or whatever the 2008 banding is) and then at 22 per cent for the remainder? Are there any other deductions that I can make (I think the £4,250 rent a room allowance only applies to resident landlords).

Finally, do I have to register as unemployed before my departure in order for this tax return to be accepted by HMRC?

TP writes: Your absence from the UK will only be on a temporary basis and as a result, you will retain your UK resident status for income tax purposes. However, because your ‘usual place of abode’ will be outside the UK for a period of six months or more, you will also be categorised as a non-resident landlord. Therefore, if you wish to receive rental income gross, you should submit Form NRL1 .

Your understanding of how you will be taxed on your rental income is essentially correct although in practice you will prepare an account of all income and outgoings for the period to 5 April 2009 and the net profit for the period will be reduced by your personal allowance in order to determine the amount which will be subject to tax. You should notify HMRC by 6 October 2009 of your chargeability to tax and they will issue you with a Tax Return form which must be submitted by 31 January 2010. You do not need to register as unemployed in order for the Tax Return to be accepted by HMRC.

As far as other deductions are concerned, you will need to consider all expenditure which you incur in respect of the property during your period of absence. If you retain responsibility for the payment of council tax, water rates, electricity, gas and repairs then the associated costs will all qualify for income tax relief. Furthermore, as the property will be let fully furnished, you will be entitled to an annual ‘wear and tear allowance’, which provides a measure of relief for the depreciation of furniture, furnishings and electrical appliances within the property. This is calculated at 10% of the annual rents after the deduction of charges which would normally be borne by the tenant but are in fact borne by you (eg. council tax and water rates). The ‘rent a room’ exemption is not relevant in your case as you will be letting out the whole of your three bedroom house and not simply a room within your main residence.

One further point is that you may wish to consider making voluntary national insurance contributions during your period of absence in order to preserve your entitlement to the state pension.

Buying a second property

My husband and I are buying a repossessed house which requires some work before becoming habitable. My husband already owns a house which has been our home for six years, and has now placed this property up for sale. We estimate that there will be a six month overlap in owning the two houses while the repossessed house undergoes works and the other house sells.

Which house should we nominate as our primary residence and will we incur capital gains on the immediate sale of our home or a later sale of the repossessed house?

TP writes: There is no requirement for you to make an election for either of the properties to be your primary residence as until the repossessed house becomes habitable, it will not be classed as an available residence.

Regardless of this point, an Inland Revenue concession exists which would also ensure that no election is required. Where a house is acquired and before being used as the main residence it is altered or redecorated, a period of up to twelve months before occupation will be treated as a qualifying period for private residence purposes, regardless of any other property which is currently treated as the main residence. Therefore, on the assumption that your overlap period (which you anticipate will be six months), does not exceed twelve months, both properties will retain their primary residence status throughout.

Primary residence

In July 1996 I purchased a house in Pucklechurch for £34,500, paying a deposit of £6,450 and taking out a mortgage of £28,050. The house was in my sole name and was purchased because employer moved from London to Bristol. I lived in the property until February 2000, when I retired, but my family stayed in our original home.

After I retired I moved back with my family and rented Pucklechurch property to the Ministry of Defence through Countrywide Mobility Partners.

A month later, in March 2000, the mortgage was paid off and ownership of the property was changed from myself to my wife.

After two years the Ministry of Defence said it no longer wanted to rent property and my wife decided to sell it. The sale was completed in September 2006 for £119,000. After estate agent and solicitors’ fees I calculate the total profit from time of original purchase to the point of sale to be £81,185.

When I purchased the Pucklechurch property I had correspondence with the Inland Revenue concerning whether it was my ‘Principal Private Residence’. At that time I nominated my Bexleyheath address as my PPR. Recently I contacted the Revenue with a view to changing my mind and was told it was too late, as only two years are allowed from the time that circumstances altered.

Does that fact that I lived in the Pucklechurch house for nearly four years and then rented it to the Ministry of Defence for over six years improve my CGT position?

As the property was in both our names, can we both claim the annual CGT allowance.

Based on me being a basic rate tax payer and my wife’s state pension being just below the personal tax allowance
threshold, the Inland Revenue calculated that the worst case CGT we each have to pay is £4,430. Can this be improved on?

TP writes: Unfortunately your CGT position is not improved by either the fact that you lived in the Pucklechurch house for nearly four years or that it was subsequently rented to the Ministry of Defence. Whilst a CGT exemption is available for properties which are let, this is only the case where the property in question has at some time been your principal private residence. Where you have two residences, the question of which is your main residence can be resolved by nomination within a period of two years from acquiring the second residence or is otherwise determined by the facts. You elected for the Bexleyheath property to be your PPR but even if you had not done so, it would still be your PPR when determined by the facts as your family remained there.

On acquiring ownership of the property in March 2000, your wife would have taken on your original base cost as the transfer between the two of you would have been deemed to take place so that no gain and no loss arose. The gain on the subsequent sale will be fully chargeable on your wife, as at the time of sale the property was owned exclusively by her. Consequently, only her annual exemption will be available to reduce the taxable element of the gain.

In calculating the extent of the gain, the original cost will be enhanced by an indexation factor of 0.067 and the eventual gain will be reduced by a taper relief reduction of 35 per cent. On the basis that her personal allowance is utilised by her state pension, I calculate that tax of a little over £10,000 will be payable on 31 January 2008.

Between us, my son in law and I have purchased a new house in Canada. We are both British citizens but we visited Canada in September for the closing, and to make the final payments. We are now back in the UK and have decided to sell – we have a buyer.

After estate agent fees and the like, the profit will be around £8,000 each. I read that you are allowed to make capital gains of £8,800 tax free. Can you confirm that this is correct?

We have received a form from Canada regarding CGT which they want us to fill in and send back. Would it be possible to do the tax here.

TP writes: As British Citizens you are correct in stating that you both will be entitled to an annual exemption (£8,800 for 2006/07) to set against the capital gains.

Therefore the capital gain you anticipate to make of approximately £8,000 will be covered by your annual exemptions. This is of course subject to any other capital gains made during the tax year.

With regard to the capital gains forms received from Canada, unfortunately these need to be completed and submitted to the Canadian tax authorities. You may also be subject to Canadian capital gains tax on the disposal and I therefore suggest that you seek Canadian tax advice.

Generally any overseas capital gains tax you pay is allowed as a credit against the UK tax arising on the same capital gain. If there is no UK tax, say because the gain is covered by the annual exemption, you are not entitled to reclaim repayment of the foreign tax from HM Revenue & Customs.

Remortgaging a let property

I own a house that I bought 12 years ago and lived in for three years. For the last nine years it has been let.

I bought the property with a repayment mortgage of £34,000 and now owe only £23,000. I have been claiming a tax deduction on the interest. Meanwhile the house has increased in value from £38,000 to £110,000.

On my own home (of the last nine years), now worth £300,000. I have a mortgage on that of £90,000.

I am thinking of remortgaging my own home to get a cheaper rate, and pay off the remaining £23,000 owed on the let house. What are the tax implications if I get rid of my original purchase loan on the let property? If I have a total mortgage on my own home of £113,000 (£90k plus £23k), how much can I claim tax relief on, if any?

TP writes: If you redeem your original loan on the rental property by re-financing your main residence the interest paid that relates to the original £23,000 loan will be allowable against the rental income you receive.

Alternatively you may wish to consider re-arranging your mortgages in the most tax efficient manner by increasing the mortgage on the rental property and using this to reduce the mortgage on your main residence. By doing this a larger amount of interest may be allowable to set against rental income. However, you would need to consider the higher interest rate you might be charged and also, the borrowing on which you can claim tax relief would be limited to the value of the property when it was first let nine years ago. For example if the property was worth say £60,000 nine years ago and you raised additional finance of £80,000, interest relief will only be available on £60,000 of the loan (including the original £23,000 loan).

Rent a room

My husband and I jointly own and live in a house and rent out a room. We also jointly own a flat which we rent out. We are both employed. Can I be solely responsible for the income from the rented room under the rent-a-room scheme - and therefore do not have to declare the income as it is under £4,250 - and my husband to be solely responsible for everything connected to the rented flat?

TP writes: Where joint owners of a property are husband and wife, or civil partners, profits and losses are treated as arising to them in equal shares unless both entitlement to the income and the ownership of the property are in unequal shares.

Therefore, as you own the properties jointly it is not possible for you alone to take responsibility for the rent-a-room income and for your husband to take sole responsibility for everything connected with the flat. Instead you will each be taxed on 50 per cent of the rent from both sources, subject to rent-a-room relief which you can both claim up to £2,125 each. Where a property is owned other than 50:50, for example, 75:25, you can elect for the income to be taxed in that proportion. If no election is made the income remains taxable on a 50:50 basis.

My son is about to buy with a mortgage a flat to rent from his sister. He is worried that he could end up with losses if (a) he doesn’t have a tenant all the time and (b) that the rent doesn’t cover all outgoings. I thought as he has a Job and pays tax that he could offset any losses against his PAYE tax. Am I correct?

TP writes: Rental losses are not available to set against other income (unless the property qualifies as a furnished holiday let, for which there are strict conditions that must be satisfied). Any rental losses arising can be carried forward and set against future arising rental profits.

My 60 year old mother is currently living in an ex-council flat which she bought many years ago through a right to buy scheme. The property is valued at £70,000. My mother would like to sell her flat and move into a two bedroom house, valued at £130,000, for which I will fund £60,000 with a buy to let mortgage. My mother is on disability benefit and will pay rent to me with housing benefit. We believe we have two options to arrange the ownership of the property.

The first is that my mother gives me the proceeds of the sale of her flat and I buy/own the new property outright. Is it possible for my mother to give me these proceeds without me incurring tax penalties? I am not in the 40 per cent tax bracket. My mother will pay me rent at a commercial rate for the full property.

The second option is that my mother and I will jointly own the new property. Are there any future capital gains tax implications to be considered here when the time comes to sell the property?

My preference is the first option as I will receive more income to cover the cost of my mortgage and the arrangement will also mean that my mother does not have any assets in her name which will be helpful when/if the time comes for her to require residential care.

TP writes: I will consider each option separately.

Option 1
If your mother gifts you the sale proceeds of £70,000 from the sale of her flat this will be considered as a potentially exempt transfer for inheritance tax (IHT) purposes. Should your mother survive seven years from the date of the gift there will be no IHT to consider. Should your mother not survive seven years you may become liable to IHT if your mother’s estate is valued at over £285,000 (the current nil rate band).

You will also need to consider the rules governing pre-owned assets which can apply where someone has use of an asset they owned previously or for which they provided, directly or indirectly, funds used to acquire the asset. Where these rules apply the occupier may be subject to an annual income tax charge calculated by reference to the rental value of the property let at open market value. This tax charge can be avoided if the user of the asset pays full market rent but then the recipient has taxable income.

The rules in relation to pre-owned assets are extremely complex and I suggest you seek professional advice before undertaking any transaction.

The sale of the property by your mother will not be subject to capital gains tax assuming this has been her principal private residence throughout the ownership of the property. When you come to sell the new property you will be liable to capital gains tax on any profit made. This will be subject to taper relief and your annual exemption.

Option 2
The second option means that you will jointly own the new property. Structuring the house purchase in this way means no potentially exempt transfer for IHT purposes will have taken place and your mother’s share of the property will form part of her overall estate. In these circumstances no pre-owned asset charge arises.

If the estate is below the nil rate band at the date of death no IHT will become payable.

Upon her death your mother’s share will pass to you and you will be deemed to have purchased that share at its market value at that time. On any subsequent sale of the property you will be liable to capital gains tax if the property is sold at a profit. Again, this is subject to taper relief and the annual exemption available.

In both cases you will liable to income tax on any profit made on the rental income received at your marginal rate.

Capital gains tax

I am currently looking at buying an apartment to let, with a view to selling when the price is right, I intend to carry on doing this with multiple properties, reinvesting the profit made from one into another. If I do this am I exempt from paying capital gains tax on the profit made from selling the first property if this is being invested into buying another one?

Also if I am buying off plan and sell the property before completion, am I liable for CGT on the profit made? If the answer is yes, if this was then reinvested would I be exempt

TP writes: Where an individual sells an investment property at a profit capital gains tax may become payable. The capital gain cannot be avoided by investing the sale proceeds into further properties.

Where a property is purchased ‘off plan’ (i.e. before the property has been built) and is sold before completion, the profit could be taxed as a trading receipt rather than capital gain if at the time it was acquired there was no intention of letting or occupation in the future. Were this applies the profit would be subject to income tax and the capital gains exemption would not be available.

Furthermore, where multiple purchases and sales occur HM Revenue and Customs may consider that you are carrying on a trade and I suggest you seek further professional advice to clarify this point.

Second property rented

I own a second property jointly with my wife which we rent out. It has a capital gain on it. Can I sell a share of this property to my sister so as only to use up my annual capital gains allowance? Would the sale by liable to stamp duty? Would the tax treatment vary depending whether I sold the whole house in shares to her over time, only sold a certain percentage or brought a share (s) back from her at a later date?

TP writes: You and your sister are “connected” persons for tax purposes and disposals made to a connected person are always treated as having been made at market value irrespective of the amount actually received. Therefore if you sell a share of the property to your sister this will be deemed to be at market value. You will be able to take advantage of your capital gains tax exemptions (your wife could also use her annual exemption) in this way.

The tax treatment will not differ if the house is sold over a period of time or purchased back from your sister as each transaction will be deemed to take place at market value.

The threshold for Stamp Duty Land tax is £120,000 however, the rules can be complex and I suggest that you seek professional advice before undertaking any transaction.

Rent in and rent out

I own a house in Durham. Due to a change of job I have had to move to Northamptonshire where I am renting a house at a cost of £475 per month. I am planning to rent my house out soon. I have advertised it for £430 per month. Will I have to pay income tax for renting out my house even though I pay more than that to rent another house?

TP writes: The cost relating to the rents paid due to your relocation will not be allowable to set against the rents you anticipate to receive from your house in Durham.

You will be liable to income tax on any rental profit you make from your house in Durham. Rental profits are calculated by taking the rents received during the tax year less any expenses incurred in connection with letting the property, for example, letting agent’s fees, certain repairs and mortgage interest if the property is financed. The costs of renting another property are sadly not allowable.

In addition if the property is let furnished you will be entitled to ‘wear and tear’ allowance which is calculated at 10 per cent of the gross rents received.

TP says: The type of tenant that you have does not affect the tax payable on the rent. You are still taxable on the rents receivable in the year after deducting allowable expenses. The fact that the tenant may be claiming housing benefit is immaterial to the tax treatment.

Initial work

I decided to let out my house last year and rent somewhere closer to work. I had the gas and electric tests done, but it turns out the wiring was poor and I needed a new boiler in order to pass the inspections. I had the work carried out in the belief that I could claim it as a deduction from the income made from the house. I spent about £5,000 on that and more on the interest only mortgage and insurance whilst the house was sitting there without a tenant.

I moved out of the house in September and the first tenants moved in last January.

I have just called the Inland Revenue to register for self assessment and briefly talked to them about my situation (I am in full time employment and pay tax through PAYE). I was told I couldn't claim for work done to the house before I had tenants move in. Is this correct? Because, if I had not had the work done I couldn't have had tenants. I figure that this is a justifiable expense that should be claimable. Should I proceed to claim all the deductions I think I'm entitled to?

TP says: Her Majesty’s Revenue & Customs (as the Inland Revenue is now known) are right in that you cannot claim for expenses incurred in getting the property up to a standard where it is fit for letting. If you incur future costs in repairs and the like these will be deductible, assuming that the property is let or available for letting. If you choose to sell the property in the future, any expenses incurred when it is empty prior to sale will also not be allowable against past rents.

Rental income whilst abroad

I am taking a career break and going travelling for 11 months with my spouse. We are leaving in October and plan to let our house whilst we are away.

The estate agent/property management company we have chosen is saying that as we will be abroad it must make a deduction of basic rate income tax from the rent and pay us only the net amount. Is this correct as we will not be ‘residing’ abroad and will not have any other income whilst we are way.

The agent mentioned a tax exemption certificate but I believe this is for non-UK residents only. What are we obliged to do both before we leave and after we return regarding the tax man?

TP says: The agent is referring to the ‘non-resident landlord scheme’ under which the agent must deduct income tax in any case where the landlord’s usual place of abode is outside the UK - unless authorised by HM Revenue & Customs (HMRC) to pay the rents gross.

One’s residence status for tax purposes is, perhaps surprisingly, irrelevant. Therefore even though your planned absence will not make you non-resident for tax purposes, you may still be considered to have a ‘usual place of abode outside the UK’ in this period for the purpose of this scheme. The solution is to apply to HMRC to receive your rents gross. This is done by completing the form NRL1 which you can obtain from www.hmrc.gov.uk/home.htm or from your local tax office.

Residential mortgage

I own my residential property outright (market value circa £500,000) and I am currently in the process of purchasing a buy to let property for £265,000. I would like to purchase the buy to let property using a residential loan on my principal property since the set up costs and interest rates are more favourable. I understand from reading other articles on your site that this is possible.

My question is what records or evidence do I need for tax and accounting purposes to ensure that I will be able to offset the income from the buy-to-let property on the residential mortgage that was used to purchase it?

TP says: You will be able to offset up to the interest on a loan of £265,000 from the property. You will need to obtain an interest certificate from your lender, which will act as proof of the interest paid should Her Majesty’s Revenue & Customs request it. Any element of the loan repayment relating to capital is not allowable against the rental income.

Tenants in common

I'm thinking of buying to let with my wife on a joint mortgage. I am in the high rate tax band, whereas she earns very little. Is it legitimate tax avoidance to buy the property as tenants in common in equal shares and execute a declaration of trust that she owns, say 90 per cent of the property? Does that mean, effectively, that the rental income, if we get any, will be her tax liability and so will the bulk of the CGT liability when we eventually sell? Do I need to inform the Inland Revenue when the deed of trust has been signed?

TP says: For a married couple income from a jointly held asset is usually taxed 50:50 unless the actual shares of ownership are different in which case the couple can, but do not have to, elect to be taxed by reference to actual shares. Hence if following purchase of the property you gift your wife a greater share, you will be taxed by reference to that ownership share rather than 50:50.

The election needs to be made by completing Form 17, available from Her Majesty’s Revenue & Customs’ website. The form needs to be returned to the taxman within 60 days of the date from which it is to apply.

The declaration affects not only income tax but also, as you have already suggested, capital gains tax.

TP says: I cannot advise you as to whether your intention of investing in property as a pension is the right decision for you, as this will be dependent on your personal situation. You could seek advice from a financial adviser who would be able to review your overall financial affairs and advise you of the relevant risk factors involved in investing in property.

You are right to acknowledge that there are tax issues that need to be considered when letting properties. Any net rental income after deduction of expenses would be liable to income tax in the hands of you and your husband. If you sell the properties, capital gains tax will need to be taken into account, unless you intend to move into the property for some time prior to sale in order to obtain some tax advantage under the principal private residence rules – but you would need to seek professional advice before undertaking such an action.

Capital gains tax will be due on the sale of any properties, although, depending on the length of ownership, some taper relief may be available, and you also have your annual capital gains tax free allowance (£8,800 for 2006/07 tax year) available to help mitigate the gain and thus the tax payable.

Starting to rent

My partner’s mum has left him her bungalow and he is thinking of renting it out. What do we need to do to do this, and how do we go on about paying taxes if the rent it for, say, £350 month, and when will we need to pay the tax?

TP writes:
You either deal with this yourself; find a tenant and let the property direct, or appoint a letting agent. It is a question of personal choice, but if letting direct you should ensure that you have a suitable tenancy agreement in place.

If your partner does not file a tax return already, he will firstly need to work out whether he has any tax liability on the rental income, and if so, notify his local tax office, which will then arrange to send a tax return form. Your partner must do this before 5 October following the end of the tax year in which the profit arises.

To calculate whether there is a profit, expenses incurred in respect of the letting, for example, letting agents’ fees, utility bills, and repairs may be deducted from the rental income.

The tax return, together with any tax due, must be completed by 31January 2008 for the current tax year ending 5 April 2007. There may also be interim payments required on account of the following year’s tax bill depending on the amount involved.

Resident overseas

I am resident overseas, but I will be coming home in the next few months.
To avoid paying tax on the capital gain that has occurred whilst I have been out of the country, would it be possible for me to sell my share of our properties and buy them back later on?

TP writes:
This is a complicated matter and I recommend that you seek professional advice as the tax treatment depends on several factors. It is possible to dispose of assets tax free before returning to the UK but there are anti-avoidance rules that may apply depending on how long you have been non-resident, when you acquired the properties, and the circumstances of the transaction.

Bed and breakfast

I am thinking of using part of my house to run a bed & breakfast guest house. I think that if I restrict the use to six or less people per night I can use the Rent a Room relief, but am confused about the CGT implications.

TP writes:
Rent a Room relief can apply where you let rooms in your home as a bed and breakfast guest house. Some adjustment may be required to separate the payment for services from the payment for the room because only the rent element falls within the scheme. However, this usually only applies where the services are substantial.

As long as your income from the bed & breakfast activity does not exceed £4,250 per annum, you will be eligible for the Rent A Room exemption. This is on the basis that your g uests share your home and do not have their own cooking and dining facilities. Insofar as that is the case, your house will continue to qualify in full for the principal private residence exemption from capital gains tax when you come to sell the property.

Canadian tax

Is UK property income for an individual resident in Canada but domiciled in the UK subject to Canadian Tax? If so is there any double tax arrangement in force?

TP writes:
As a Canadian resident you are subject to tax on your worldwide income, so your UK letting income should be reported on your Canadian tax return. As a non-resident landlord for UK tax purposes, the rental income, depending on the level of profit, may be subject to tax in the UK. As Canada has a double tax treaty with the UK, it should be possible to claim relief in Canada for any UK tax due on the rental profits.

Deductible expenses

I currently own one investment property and am buying another - I have a home
office in my main residence which I use to manage the property although I also have a full time job. Are any of the costs associated with the home office, such as heating and lighting, the cost of furniture and my PC, deductible from the rental income.

TP writes:
Only expenses that are incurred ‘wholly and exclusively’ in connection with the letting activity are allowable for tax purposes. The Revenue would argue that you do not use your PC and the furniture exclusively for these purposes, and therefore only a proportion of those costs would be allowable, and similarly the cost of light, heat and furniture.

You cannot claim the initial cost of equipment as a deduction. Instead you would need to claim capital allowances (restricted for private usage not connected with the letting activity) in respect of the furniture and PC. In the year of purchase you can currently claim 50 per cent of the purchase price. This amount is then reduced by the private use element. The remaining 50 per cent of the cost is then carried forward to the following year, and the allowance claimable is 25 per cent of that amount, again restricted to the element relating to the letting. The residue is then carried forward and claimed on a year by year basis until it is extinguished.

TP writes:
A married couple can only have one property that qualifies as their main residence. Therefore the house where you live, owned by your wife, is your main residence and is exempt from capital gains tax. The second home would be fully liable for capital gains tax on any profit realised on its sale as it has never been occupied as your main residence. As the property is only in your name, any capital gains tax will be assessed on you. You will have your annual exemption available to reduce the taxable gain, assuming that no other capital gains arise in the year.

As you only acquired the property three years ago, and effectively acquired the two half shares at market value, there may no be a significant capital gain to date. If there is a gain then you are correct that this can be reduced by you and your wife occupying the property as your main residence. There is no minimum period of occupation required as it is the quality of the occupation rather than length of occupation that determines whether a property is exempt from capital gains tax, but the property has to be used as your main residence in that period and clearly the longer the period of occupation the greater the chance of securing the relief.

Assuming that you are able to establish that the bungalow is your private residence during the six to eight month period of occupation, the last 36 months of occupation out of the total period of ownership will be exempt. Additionally, the lettings relief will be available and this should extinguish any residual gain.

In order to reduce any potential exposure to capital gains tax, should you change your mind about residing in the property for sufficient time to establish it as your private residence, it would be sensible to ensure that it is owned jointly by you and your wife, as this would help reduce any potential exposure to capital gains tax, should the sale be taxable.

Capital gains tax is payable by 31 January following the end of the tax year; so if you were to sell the property in the current tax year, that ending 5 April 2007, then the tax would be payable on 31 January 2008.

Buying cash or with mortgage

As part of retirement scheme (I have little in the way of a pension) I plan to buy a small house and rent it out to provide both an income and capital growth. I had intended to pay cash, but reading your comments about being able to claim interest payments I am wondering whether I should perhaps be looking at getting a part mortgage or indeed an interest only mortgage? I've got a large mortgage on my main home.

TP writes:
As you have cash savings you need to decide how best to use these. This is ultimately a personal decision and one where you should seek financial advice. As you mention, the interest payments on mortgages secured on buy to let properties is tax deductible against the rental income received on the property whereas you get no tax relief on the interest you pay on your mortgage. Hence you might consider using your savings to reduce your own mortgage and then borrow to purchase the buy to let property with the aim of maximising tax relief on your total borrowing requirements. However, you should look at the interest rates being offered and also consider how much of your cash savings you feel comfortable using before making any final decisions.

Void periods

Do the same rules apply during void periods in relation to deductible expenses?

One of your previous answers dealt with CGT on selling a let property which had previously been a principal place of residence. My accountant has advised me the calculation is: profit on the sale time the number of months in residence plus 36, all divided by the number of months of ownership. Is this correct?

TP writes:
To be able to claim expenses incurred whilst the property is unlet, it must be your intention to continue to let the property. Therefore, if you have outgoings whilst the property is empty pending its sale, then you cannot claim those expenses.

The calculation of the capital gain on the sale of a let property that had previously been your private residence is basically correct. In addition, you may be able to claim indexation allowance, as well as lettings exemption – this could be up to £40,000, if there is still some capital gain after these allowances, a further relief could be due which is taper relief, the amount of which is dependent on the length of time that you have owned the property. Also, don’t forget that you have your capital gains tax exemption available, assuming that you haven’t realised any other capital gains in the tax year.

DIY redecoration costs

I have recently inherited my mother's house on her death. I intend to let out the house. Whilst the house is perfectly habitable it is in need of redecoration throughout (she was a smoker and had an older person's taste in decoration).

As I have recently retired I intend to do much of the work myself. When I do so will I be able to claim for travelling expenses to and from the house (journeys being solely for the purpose of redecoration) as this involves a 50 mile round trip, and if so at what rate? Will I also be able to set against tax on the rental income my time spent in redecorating, and if so at what rate?

I assume I will be able to claim for the cost of materials as long as I keep receipts as evidence. Similarly I assume I will be able to deduct costs of rewiring and the like if done by a contractor so long as I keep receipts/paid invoices as evidence?

TP writes:
The cost of rewiring or any other repairs undertaken by a contractor will be deductible against the rental income that you will receive, but it is important to keep the invoices. Also, if any of the repairs are of a capital nature – essentially an improvement to the property (other than rewiring, installation of central heating and double glazing) – it is a good idea to get a separate invoice for those works, otherwise you could end up involved in arguing the split between the cost of the repairs, which are income tax deductible and the capital element, which would only be deductible from any capital gain realised on the property on its sale.

The question concerning DIY repairs is more difficult. The cost of materials is clearly deductible. The cost of travel to the property should also be allowable, provided the only reason for your trip is in respect of the property and its future rental. However, you cannot deduct anything for the time you spend working in the property.

Claiming for renovations

I bought my first buy to let property in February 2004 and spent time renovating it before letting it out in October of that year. The tenants took possession in October 2004 and are still there, paying rent regularly each monthly. They signed a second one year contract last October.

I have not received a tax return form from the Inland Revenue. Do I need to contact them myself or will they send me a form automatically?

I obviously owe tax back to 2004. Can I sort this all out on one form? Finally, can I claim my interest payments even if the mortgage is a repayment buy to let mortgage, and can I claim for renovations I did prior to letting the house out – for example fitting new windows.

TP writes:
You will need to contact HM Revenue and Customs (HMRC) to obtain an income tax return form for each tax year – in your case 2004/05 and 2005/06. You cannot deal with everything on one form as the rental income arises in two tax years. For 2005/06 you will need to notify them that you need a return form before 5 October, otherwise penalties could be levied.

The tax return for 2004/05, together with any tax payable, should have been submitted by 31 January 2006 and you will be charged interest on any tax paid late and possibly a penalty. The tax return for 2005/06, together with any tax payable, is due to be submitted to HMRC by 31 January 2007.

Interest payments on buy to let mortgages are an allowable expense against the rent received and can be claimed from February 2004. The replacement of windows, including replacing single glazed windows with double glazed units, is generally allowable when the costs are incurred during the letting. The position for pre-letting renovations is more complex and whether these costs will be allowable will depend on the condition of the property when you acquired it.

Letting a room

What are the tax implications of letting a room in the property where I currently live? I am considering renting a double room and just need to know what I would need to declare?

TP writes:
If the rent does not exceed £4,250 in a tax year, then there is no tax liability. If the rent exceeds this amount, then you can choose whether to pay tax on the amount in excess of £4,250, or the gross rents less any expenditure incurred.

Renting a room out in your home does not have any implications for capital gains tax purposes, but you should check with any mortgage lender that you are able to let a room under the agreement with them.

The room must be furnished and must be in your own home.

Available deductions

I am about to buy a four bed house in a very popular commuter belt in which I intend to live. The remaining three bedrooms I will let out. The kitchen, lounge and bathroom will be shared.

The house needs serious amounts of modernisation and redesign. I will do a lot of this myself and when necessary call in professionals.

The mortgage I am looking at is a repayment mortgage that will cost approx £1,600 per month, hence the need the let out rooms.

I expect to get approx £1,000 per month in rental income.

I am trying to understand what I can and can’t claim for as a live-in landlord. The Inland Revenue site is not exactly helping.

TP writes:
Common-sense principles apply where you let a part of your home. That is, you need to split expenses between private use and rental use. The most reasonable method in this instance would be to claim 75 per cent of all utility bills against the rental income, on the basis that you will let out three out of four bedrooms.

The costs of repairs may be claimed in full where they relate to the let rooms, and a proportion can be claimed in respect of the common areas. If you are letting the rooms furnished, the cost of the furniture cannot be claimed as an expense in full. The usual practise is to make an annual claim of 10 per cent of the rental income after council tax to cover these items and their replacement. Claiming for the cost of items such as roof repairs is more difficult, as strictly they do not relate to the rental business.

It is impossible to lay down hard and fast rules because circumstances vary enormously. The aim is for the rental business deductions to reflect the rental use of the property in a fair and reasonable way.

Interest on a loan for the purchase or improvement of the house may also be split in the way outlined above. Relief for the ‘business’ element may then be claimed in computing rental business profits.

Unable to sell

I am currently letting my apartment due to problems selling. I am incurring high rental on new flat, in another area. In view of this, is my flat considered an investment property and do I need to register with the Inland Revenue?

If I am unable to sell the flat, how long do I have to sell the flat before I am liable to pay capital gains tax on the profit I have made on the flat?

TP writes:
Some years ago, in recognition of the slump in the housing market, the rules were relaxed on the length of time you could keep your home, without living in it yourself, before capital gains tax would become payable. Your apartment will remain tax free for three years after you have moved out of it, even though it is let out during that period.

If you do not sell it after three years, but it is let out, then a proportion of the capital profit relating to the let period that exceeds three years will be subject to tax. However, as it was previously your home, you will be entitled to ‘lettings relief’, which can exempt amount to up to £40,000 of any capital gain and additionally, if not already used, your annual capital gains exemption (£8,800 for 2006/07).

Selling within three years

I bought my current house in 1998 and lived in it until 2004. In 2004 I moved out and let the property. This is the only property that I own. My understanding is that if I decided to sell it now, I would not be liable for capital gains tax as it is still within the three year exemption timescale.

Is this correct? Furthermore if I decided to continue renting for a further four years and then decided to sell, would I be liable for CGT and if so could I avoid paying by moving back into the property for a short period and then selling?

TP writes:
The last three years of ownership of a property that has been your only or main residence are treated as years of owner occupation and hence attract the capital gains tax exemption along with actual periods of occupation. This is so regardless of how the property is used in the period. Moving back to the property prior to sale will not improve the position as the actual occupation will fall within the three year exemption - to benefit from moving back you would need to live there for more than the final three years.

The capital gain will apportioned over the total period of ownership. The periods of actual occupation plus the last three years will be exempt. If you let the property for a further four years and sell in, say, 2010, 9/12ths of the gain will be exempt (six years of actual occupation and three years of deemed occupation). The remaining 3/12ths will be taxable, however, as it was previously your home, you will be entitled to ‘lettings relief’, which can exempt amount to up to £40,000 of any capital gain and additionally, if not already used, your annual capital gains exemption should be available.

What now?

In March 2001, together with my wife, I bought a 50 per cent share of the council flat in which we then lived under the right to buy scheme. The remaining 50 per cent is still owned by the council.

In May 2002 I bought the three bedroom house in my own name. We moved in and still live there. Meanwhile we let out the council flat to a housing association on a guaranteed three year lease at £16,380 per annum and have now renewed this for a further three years but for £13,000 per annum.

We even thinking of buying another property to live in and let out the house where are currently live.

We have not filled in any tax form in relation to our rental income. I am in full time employment and a tax payer. I have a mortgage on the flat. What do I do now?

TP writes:
Depending on whether a profit arises on the rental of the flat you and your wife may need to complete tax returns. The mortgage interest is deductible from the rent received, as would be any other expenses that you incur – for example, insurance or repairs.

If there is any profit for any of the past tax years, you should contact HM Revenue & Customs and inform them that you need to complete a tax return. Given that you will be late in filing the tax returns, you may incur interest and penalties.

Allowable interest

I am looking at buying a property to let. I understand I can offset the interest on the mortgage with any income from the rent before I am taxed. Is it still possible to do this if I don't get a buy to let mortgage, but instead re-mortgage the house I live in to raise the money for the buy to let property?

TP writes:
As you are re-mortgaging, and so increasing your original mortgage, the interest payable on the element used to acquire the let property will be allowable against the rental income. You cannot claim the interest payable on a mortgage to purchase your own home, so that portion will not be allowable for tax purposes.

Future gains

I bought my current flat with my girlfriend four years ago for £137k and we are now looking to let this and buy a second home. The flat has recently been valued at £237k and I would like to know how this gain will be treated for tax if we sell the property in say 10 years.

TP writes:
Having lived in the property, part of the period of ownership will be exempt from capital gains tax. This will be calculated on a time apportionment basis, and the exempt period will be extended by three years even though the property was let. Thus, if the property was owned for a total of 14 years, half of any capital gain would be free of tax (four years as your only residence and three years further exemption). The remaining half of any capital gain would be reduced by the available lettings exemption, which is the lower of £40,000, and the exempt gain. However, the gain can only be reduced to zero – it would not be possible to create a capital loss on the sale of the property.

As you and your girlfriend bought the property jointly, you are both entitled to the lettings exemption, which, in view of the amount, is of great benefit, as potentially up to £80,000 of relief would be available.

In the event that there is still a capital gain arising, you will be able to claim taper relief, which reduces the amount of the taxable gain based on the period of ownership.

You would also each have available your annual exemption, assuming that no other gains were realised in the same year of sale, to further reduce any exposure to capital gains tax.

Moving in – letting out

My boyfriend, who owns his flat, is moving into my rented flat. We have decided to rent out his flat, in which he has lived in for five years, through an agent. Please could you inform me what tax we should pay on this? Do we just inform the tax office and they work it out? Also, if we decided to rent out his flat for a number of years what tax would we have to pay on selling the property?

TP says:
Your boyfriend will be taxed on the annual net letting income, that is rents less allowable expenses such as loan interest, agents commission and repairs. He will need to provide H M Revenue & Customs with details of the income and relevant expenses and calculate the rental profit by completing the ‘land and property’ pages of his tax return. If he does not already file a tax return he will need to do so in future and he should notify his tax office of his changed circumstances. Currently tax returns have to be submitted to H M Revenue & Customs by 31 January each year otherwise penalties may be charged. If the return is submitted before the 30 September the tax office will calculate the tax he has to pay, otherwise he will have to do this.

As the flat has been his principal private residence, some of the gain arising on its disposal will be exempt from tax. The relief applies to any period of owner occupation plus the last 36 months of ownership whether occupied or let in that period. Furthermore, if a gain arises for the period of letting, this can be reduced further by a special exemption that is available where someone lets their former home.

Best investment vehicle

What is the best vehicle to put investment property into from a tax point of view? In New Zealand we use a limited company called a LAQC (Loss Attributing Qualifying Company), which allows you to write paper losses (from depreciation) off against your income. Is there anything similar in the UK?

TP says:
We do not have anything similar to a Loss Attributing Qualifying Company in the UK. It is possible to hold investment properties through a company, but there are no special rules for allowing depreciation as a tax deduction. A potential problem with holding investments through a company is in extracting income or the profits when the company sells the property, as this can result in a double tax charge. Whether company ownership is suitable will depend on an individual’s circumstances and objectives, but personal ownership (either solely or in joint names) avoids the potential double charges and may provide greater flexibility.

Moving to sheltered accommodation

If a single person with disability who is moving into rented council sheltered accommodation sells his current home but buys flat to rent, will he be taxed for rents under schedule A, D, or E?

This situation is further complicated since a relative has contributed £15,000 to the £105,000 price of the flat. What would be the relative’s tax liability?

Both the disabled person and the relative are currently taxed under PAYE at standard rate, and have no other income other than their wages.

TP says:
The UK has now dispensed with the scheduler system of taxation and what was previously taxed under Schedule A is now merely referred to as ‘property income’. However, the change of name has no practical effect on the basis that rents are taxed.

If the relative has contributed and owns a share in the flat, the income should be split in the same ratio. Alternatively if the amount has been loaned by them, they will not be entitled to a share of the income and would have no tax to pay.

As neither the disabled person nor the relative are higher rate taxpayers, any profits arising from the letting of the property will be taxed at 22 per cent (providing the total income for the year including letting is less than £32,400 after deducting the personal allowance).

Deductible expenses

I have let my house at £500 a month. Please can you tell me which of the following I can set against that income:

• insurance at £15 per month;
• mortgage interest at £250 per month;
• boiler breaks down repair (cost £90); and
• leaking tap repair (£25).

Can I allow all of the above and still claim a 10 per cent wear and tear deduction?

TP writes:
All the expenses detailed are allowable to be offset against the lettings income.

The 10 per cent wear and tear allowance can be claimed in addition to these expenses providing that the property is let furnished.

Buying and selling

I am a single person living at my parents’ home. I purchased a property with the intention of eventually making this my main residence. In the mean time I have let the property.

Some 18 months have now passed, and now I am considering selling the property to purchase a new home to move into - or possible rent out again.

What are the ramifications should I do one or the other?

Also I have made additional payments into the property mortgage from my own pocket, would I have to pay tax on this?

TP says:
If you have never lived in the property you cannot claim that it was your principal private residence and therefore any gain arising will not be exempt. You may wish to consider occupying the property as your home before selling as you may then be eligible to claim the exemption on the entire profit. There is no minimum period of owner occupation required as it is the quality rather than the duration of occupation that is relevant. However, the general view is longer the better.

If you purchase a new property to live in then this will become your new principal private residence nd any gain on its disposal will be exempt. If you do not occupy the new property you will be liable to capital gains tax on any profit arising when this is sold.

You will not be taxed on the mortgage repayments.

Tax on rental income

I own a house at the moment and am looking to rent it out. This will be the only property I own and I will be renting another place for myself. The rent I receive will cover the mortgage and no profit. Do I have to pay any tax in relation to the property?

TP writes:
Although you state that the rental income will cover the mortgage, only the mortgage interest can be deducted from the rents for tax purposes. Therefore if the repayments include an element of capital this cannot be offset against the rents received and any surplus rents will be taxable.

Making a loss

I currently have two properties, one jointly owned with my boyfriend, one in my own name. Both are mortgaged.

I used to stay at both properties but when I became pregnant I moved in with my boyfriend. Meanwhile I let my sister, who also lived in my first property, stay there on her own. She pays money towards the costs when she can, but not nearly enough to cover all of the monthly outgoings.

I only keep the house on to help my sister because she was made bankrupt a couple of years ago, and so can’t borrow money. She can’t get a council property and she couldn’t afford to rent if she did, and has nowhere else to live.

Even though I don’t make any profit, am I still classed as a landlord and therefore earning money from property (even though I actually make a loss)? Should I have a buy to let mortgage and declare everything? Am I facing any trouble for this arrangement?

TP writes:
As you are letting a property you will need to report this to H M Revenue & Customs. However as it is not let at a ‘commercial rent’ you are unable to claim any loss arising and you can only deduct the expenses of the property up to the rent you get from it. This means that it will produce neither a gain nor a loss.

You should contact your mortgage lender to discuss the appropriate mortgage for this property.

Profit on letting

My brother and I jointly own a four bedroom flat. Our monthly mortgage repayments are £900.

I am moving out of the flat in the summer to move into rented accommodation with my boyfriend but my brother is going to continue living in the flat. We plan to rent two of the bedrooms in the property out to friends. We anticipate charging £400 per calendar month per room, making a total annual rental income of £9,600. Bills will be extra, in the region of £87 a month.

I wonder if you could help clarify the position with regard to income tax? I have been told that I have to pay 25 per cent on the profit I make, but on reading the Inland Revenue literature it looks like it is added to our individual income tax returns.

TP writes:
The net rental income after allowable expenses and mortgage interest paid will be apportioned between yourself and your brother and details reported on your individual tax returns. The rental profit will be added to your total income and taxed at 22 per cent or 40 per cent if you are a higher rate taxpayer.

Selling up

I bought a property in my sole name in 1992 and lived there for 12 years. The year before last I acquired another property, which became by main residence, but kept the original flat and let it out. I am debating whether to sell the flat. Where do I stand as regards potential capital gains tax.

TP writes:
If you sell a property which at any time during your period of ownership has been your main residence, then part or all of the gain will be exempt.

There is also an exemption for the last 36 months of ownership as well as a lettings exemption. Therefore if the property is sold within three years of it ceasing to be your main residence, any gain should be exempt from Capital gains tax.

Rent as a deduction

I currently have two houses. I live in one during the week and the other at the weekends. I am expecting a baby and neither home would be suitable. I am therefore looking at letting both out and renting another property in London for myself. Is there any way I can treat the rent on the new London property as a deductible expense, or will I be liable to tax on the properties I am renting out?

TP writes:
As the rent paid on your new London property is not incurred wholly and exclusively for the purpose of the letting business it is not a deductible expense.

You will be liable to tax on the net income arising on the rented properties after allowable expenses. Tax being charged at your marginal tax rate.

Renting out a principal private residence

I have been reading your answers to peoples’ questions about renting out their principal private residences. I have some basic understanding of tax and understand the three year exemption rule that applies in such circumstances. However you lose me on the further £40,000 exemption. Please explain.

A further question. Say I have lived in my house for five years during which time its value has increased by £150,000). If I then rent it for 10 years (when the increase in value might be £50,000) the first £150,000 would seem to be exempt from the tax calculation. So in taking the three year exemption into account do I calculate my capital gains tax on 7/10 of £50,000 or 7/15 of £200,000?

TP writes:
The further letting relief is available when you sell a property which at some time has been your main residence and part or all of it has at some time been let as residential accommodation.

The relief is calculated as the lower of:
• the amount of the private residence relief already calculated; or
• £40,000; or
• the amount of the gain attributable to the residential letting.

When you sell your property any increase in value will be spread evenly over the entire period of ownership, therefore the gain will be £200,000.

In your example, of the 15 year total period of ownership, 8 years will be exempt ( 5 years occupied + last 3 years), therefore the exempt amount will be 8/15 x £200,000 = £106,667.

The further lettings exemption will therefore be the lower of:
• the amount of the private residence relief already calculated = £106,667
• £40,000
• the amount of the gain attributable to the residential letting = £93,333.

In this case the exemption is £40,000 which will be deducted from the gain leaving a chargeable gain of £53,333 before taper relief and the annual capital gains tax exemption. It should be noted that where a property has been owned jointly, the additional letting exemption is potentially available to each joint owner.

Marital question

I have owned a flat for 20 years which was bought when I was single. As a consequence it was purchased in my maiden name.

I have now been married for 14 years during which time I have let the property (living in the home I bought with my husband when we married).

If I sell this flat now do I have to pay capital gains tax and if so how can I minimise the amount?

TP says:
A husband and wife can only have one main residence between them so that it is likely that your previous flat will only be treated as your main residence for the first six years of ownership and the marital home being treated as your main residence thereafter.

If a property has been your main residence at any time, then the last three years of ownership are automatically exempt. Thus 9/20th of the gain will be exempt. Additionally there is a further exemption of a maximum of £40,000 if a main residence has been let.

The amount exempt is calculated as the lowest of:
• the amount of private residence relief already calculated, or
• £40,000, or
• the amount of any chargeable gain you make because of the letting.

You will get an indexation allowance on the cost of your property from the date of exchange up to April 1998. Proceeds minus costs of sale, indexed cost and indexed enhancement expenditure will give you your chargeable gain for the purpose of these calculations.

You can then reduce the gain you have calculated by taper relief. If you sell before 6 April 2006, you will be treated as owning the property for eight complete years (seven years from 6 April 1998 plus a bonus year since the property was owned before 17 March 1998). You can thus reduce your gain by 30 per cent.Thereafter taper increases by 5 per cent per annum with a maximum taper rate of 40 per cent for non business assets.

Finally you have an annual exemption of £8,500 for the 2005/06. This can be deducted from your gain after taper.

Allowable Interest

I am moving house and I am looking to rent the property that I have lived in as my main residence for a number of years.

I bought the house for £255k and originally had a mortgage of £225k. I have since paid some of this off so that the mortgage is now down to £165k.

If I release equity say £35k by repaying the original mortgage and taking out a buy to let mortgage of £200k, can I deduct all of the interest on the new buy to let mortgage from my rental income for tax purposes?

TP says:
When you first let out a property that you own but have not previously let, the Revenue allows you to treat the property as appropriated to your property business at its current market value. You can then borrow on the security of your let property up to its value.

You can withdraw the resulting cash from the business, making sure that your notional balance sheet does not become overdrawn. In your case, you should be able to get a full interest deduction both for the replacement element and the additional amount, as long as the property is worth at least £200,000.

This treatment is slightly unexpected and your Inspector may insist that you are only entitled to interest relief on borrowings taken out to buy, improve or repair your property but the above treatment is backed up by the Revenue procedural manuals.

Residing Overseas

Can you tell me if my husband and I are liable to pay tax on rent if we let our home in England while residing in Saudi Arabia? We intend to be away for several years.

TP says:
The Revenue expects you to pay the basic rate of tax on rent from UK property even if you do not live in the UK. Your managing agent has to deduct the tax and pay it over to the Revenue. If you do not have an agent, the tenant should deduct the tax. Alternatively, you can tell your agent that you will be doing an UK tax return each year, in which case, they can pay you gross.

You may find that you will not have much tax to pay because you can deduct your mortgage interest and take a 10 per cent wear and tear deduction from the rent if you let furnished.
If you and your spouse own jointly, then the rent will be split and you can also each use your annual personal allowance against the net rents.

Deductible expenses

What expenses can be deducted by an individual landlord from rental income for calculation of income tax? Do chargeable expenses include agent's commission (for finding a tenant), and ground maintenance charges? And how about the other expenses incurred – for example expenses on trips made to collect the rent, and my accountants’ fees?

I understand that 10 per cent of the rental income is allowed as the wear and tear on property and need not be supported by any proof of expense. Is this correct?

TP says:
HM Revenue and Customs will treat your letting activities as a business even though you are an individual and whether you have one property or several.

You can deduct your revenue expenses from your rents. Revenue expenses are broadly what you need to spend to earn the income, but not those expenses that improve (increase the value of) the property.

Deductible revenue expenses would include agent's commission for finding a tenant and ground maintenance charges. Sometimes expenses only partly relate to the business in which case you may need to split the amounts.

You mentioned trips to collect the rent. That would be OK if that were the only thing you were doing but if you lived in London and had a holiday home and a letting property in the Cotswolds, you couldn't charge the cost from London. It would be fair to charge mileage from your country cottage to your letting cottage. The Revenue allows you to claim a deduction at the rate of 40p a mile if you drive.

You could claim a deduction for your accountant's costs in relation to your letting accounts but not for the cost of preparing your tax return.

Some revenue expenses are specifically disallowed as deductions – for example, entertainment.

If you let a property fully furnished, you can claim 10 per cent of your rents as a wear and tear allowance. The 10 per cent is calculated on the rents less those expenses you pay which a tenant would normally pay. This is an additional deduction and is independent of what you actually spend on furnishings.

There is an alternative ‘replacement method’ that means instead of the 10 per cent deduction you deduct from income the cost of replacing worn out or broken furniture (but not for what you spend on kitting out the property for your first letting) as and when incurred but .

You have to stick to one method or the other and the wear and tear method is generally easier to work out and will give you a more even deduction.

Financial year

Please could you help me with a rather basic question, which I have found difficulty in finding out about. When I rent out my property I know I have to prepare an annual return for the Inland
Revenue. Is the period the 6 April to 5 April each year?

I have been told by a friend that it is from 1 April to 31 March. So is it variable for each individual or is there a prescribed period?

TP says:
You can choose any year you like for your business. However, it is generally easiest to coincide with the tax year which ends on 5 April. By concession, the Revenue will treat accounts drawn up to 31t March as being to 5 April and it is often more convenient to use 31t March as your year end since it is simpler to pro rata expenses and income in monthly amounts.

MIRAS morass

Having read through leaflets from the Inland Revenue, I'm confused by mentions of MIRAS. Are my payments tax deductible on buy to let mortgages?

TP says:
MIRAS has been abolished but some Revenue leaflets may still refer to it. Ignore what they say.

You can indeed deduct the interest element of payments on buy to let mortgages from rental income.

Selling up

I own one property. I bought it in October, and lived in it until January 2005. After that I moved into my partner’s house and have had a tenant renting my flat since then. Now I would like to sell the property. I have not yet claimed on any of the usual expenses such as management company fees, repairs and the like. Will I be liable for capital gains tax and/or what will I have to pay?

TP says:
As you only own the one property, this will be treated as a matter of fact as your main residence for the period during which you occupied it.

The property has at some point been your main residence so the final 36 months of ownership will be deemed to be a period of main residence whether or not it actually is. Since you intend to sell your property now, within three years of moving out, you will have no capital gains tax to pay as the sale of your main residence is exempt from capital gains tax.

The expenses that you have not yet claimed such as management company fees and repairs are classed as revenue expenses. These can be deducted from the rental income that you have received, which you will need to declare on your tax return. You cannot deduct expenses that relate to the period when you lived in the property. Capital items, which can be defined as being the cost of buying, altering, building, installing or improving fixed assets cannot be included as an expense against rental income.

If you were married to your partner the situation would be different as a husband and wife living together can only have one main residence between them.

Releasing Capital

Can I release some of my capital by way of mortgage from a rented property I own to either buy another property or spend over a period on the original property and obtain tax relief?

TP says:
You may use any property as security for a loan and get tax relief on the interest as long as the loan is used for an allowable purpose - which would include the purchase of a property for letting or work on an existing letting property. Additionally Revenue and Customs allows you to withdraw funds from a letting business and still get interest relief, no matter what those funds are used but just so long as the notional balance sheet does not become overdrawn.

Renting while Selling

I have moved to a new job and bought a residential flat to live in. For the last 9 months I have rented out my ‘old’ house through an agency, mainly because I couldn’t sell the property. What is the time limited for selling my ‘old’ house as I don’t want to pay CGT?

TP says:
Provided that your old house was your main residence prior to you buying your new flat (I assume that you owned only your old house prior to moving), the last 36 months ownership will be deemed to be a period of main residence.

If you sell your house within 36 months of moving out there will be no capital gains tax to pay, as the sale of your main residence is exempt from capital gains tax.

Additionally you will be entitled to a rented property exemption of a maximum of £40,000. The exemption applies on the sale of a let property that has been your main residence at some point. The rented property exemption is increased to £80,000 when a property is jointly owned.

Sale of rented property

I have a rented property that I propose to sell. I understand that if I buy another within three years there will be no capital gains tax to pay and that I can carry the capital gains tax over to the next property. Could you please confirm this for me?

Could you outline the areas where the Inland Revenue will allow deductions when calculating capital gains tax on the sale proceeds of rented property?

TP says:
The rules for rolling over gains only relate to properties used in a trade. The letting of property can be a business but is not treated as a trade. You can only roll over your gain if the property was used in a qualifying holiday let business.

You can deduct the original cost of the property plus the incidental costs of purchase and sale such as legal fees, stamp duty, and land tax. You can also deduct improvement costs, so long as the value is reflected in the property when sold – for example, if you built a conservatory then knocked it down and built an extension, you could only deduct the cost of the extension, not the conservatory as well.

The gain itself can be reduced if the property has at any time been your main residence.