A taxing property question

mikemcr_2

I’m trying to pre-empt future tax problems and welcome any input from those in the know.

In 1995 I bought part of a warehouse for £32.5 k and converted it into an apartment for approx £45k. The total spend with legals was just over £80k, which I finally paid off last year. And it’s probably worth around £220k today. I live there on my own and my partner lives on her own in a rented house.

We’re in the closing stages of purchasing a run down remote rural property for £135k as a 2-year rehabilitation project to use as a holiday home with the potential for holiday lets.

The easiest way to raise the purchase price for the rural property was to re-mortgage my apartment as we were advised that it would be very difficult to raise a mortgage on the rural property because lenders don’t like off grid run down properties.

As we can’t afford to run 3 homes, the plan is for me to move in with my partner, rent out my apartment to pay for the re-mortgage and then raise funds for the rehabilitation work somehow next spring. We’re quietly confident of being able to raise the estimated £70-90k needed for the rehabilitation work as the value of the completed project should be around£250k.

As my partner doesn’t already own a property it might make sense to have it in her name as her primary residence. Has anyone any ideas on the best way to handle the ownerships whilst minimising / off setting potential tax bills, bearing in mind that we don’t anticipate selling it in the short or medium term?

We’re open to all ideas.

lincroft1710

You'll pay tax on any profit you make from renting out your apartment. If you raise a mortgage against its value then you'll have to tell lender you're renting it out. Spending £70/£90K on £135K property probably won't make you any money in short term as its value next year will probably be less than £250K. Capital Gains Tax won't occur until you sell the renovated property, but if its in her name and the partnership hits the rocks ....!!!!!!

mikemcr_2

lincroft1710 wrote: »

You'll pay tax on any profit you make from renting out your apartment. If you raise a mortgage against its value then you'll have to tell lender you're renting it out. Spending £70/£90K on £135K property probably won't make you any money in short term as its value next year will probably be less than £250K. Capital Gains Tax won't occur until you sell the renovated property, but if its in her name and the partnership hits the rocks ....!!!!!!

thanks for your input lincroft,

I'll look at amending my re-mortgage to allow for the apartment to be rented out. I hope I'm right in thinking that I'll be able to offset this remortgage plus management / maintenance costs against rental income for tax purposes.

I'm still unsure of how to efficiently structure our intentions for tax purposes. I’m self employed, my partner lectures at a college and we’ll have rental income from the apartment, potential lettings on the rehabilitated rural property in 2 years time and ownership / CGT issues for when the properties are eventually sold in the long term. Neither of us have pensions so this is most of our retirement plan.

But in the short term the remote rural property is more about improving our quality of life - instant gain isn't our motivation. We appreciate that property prices are tumbling but our calculations show that we’ll only be reliant on an occupancy rate of 20-30% from holiday lettings once it's rehabilitated, to cover costs.

We’re unsure whether it's best to try and transfer this rural property in to my partners name if we can do it without incurring tax as there are advantages in having 2 properties between us that both qualify as principal residencies (as long as our rented accommodation could be treated as necessary for work).

As I have lived in my current property for 11 years I guess I could rent it out for 3 years without CGT being an issue. After that, I'd have a lettings allowance of £40k on any value increase plus a CGT allowance from the year of sale currently around £10k. If this is true, it's only after the property has increased in value by a further £50k that CGT would kick in. If true, this could easily be some time away.

One important point is that these properties are going to be held for the long term. One solution might be to marry, divorce a couple of years down the line and retain 1 property each, as married couples can only have 1 principal residence. This might seem a little far fetched and maybe there are better solutions. We’re just not sure what they are.

ps - if the partnership hits the rocks - we'll negotiate a settlement along "war of the roses" lines.

Pennywise

mikemcr wrote: »

As I have lived in my current property for 11 years I guess I could rent it out for 3 years without CGT being an issue. After that, I'd have a lettings allowance of £40k on any value increase plus a CGT allowance from the year of sale currently around £10k. If this is true, it's only after the property has increased in value by a further £50k that CGT would kick in. If true, this could easily be some time away.

You've got the wrong end of the stick. It's not the increase in value over the period it wasn't your home that matters. It is the time-apportioned portion of the gain over the whole period of ownership. So if you owned it for say 20 years and you lived in it for 11, and made, say £200k profit (difference between eventual selling price and original purchase (and improvements) costs, your taxable gain would be:-

Gain £200,000
Less PPR relief (14yrs out of 20) £140,000
Less Lettings relief £40,000
Gives a gain of £20,000
Less your annual exemption £10,000
Gives capital gains tax due on £10,000.

mikemcr_2

Pennywise wrote: »

You've got the wrong end of the stick. It's not the increase in value over the period it wasn't your home that matters. It is the time-apportioned portion of the gain over the whole period of ownership. So if you owned it for say 20 years and you lived in it for 11, and made, say £200k profit (difference between eventual selling price and original purchase (and improvements) costs, your taxable gain would be:-

Gain £200,000
Less PPR relief (14yrs out of 20) £140,000
Less Lettings relief £40,000
Gives a gain of £20,000
Less your annual exemption £10,000
Gives capital gains tax due on £10,000.

Thanks for taking the time to reply Pennywise - the penny has finally dropped!

silvercar

jimmo wrote: »

Main Residence Relief is really personal to the extent that I struggle to see how 2 people who are partners can have separate homes.
If you currently live in your flat and she lives in rented accommodation how come you are partners?

Its the latest fashion:

http://property.timesonline.co.uk/tol/life_and_style/property/article5183441.ece

No doubt the tax laws will catch up....eventually.

mikemcr_2

jimmo wrote: »

Main Residence Relief is really personal to the extent that I struggle to see how 2 people who are partners can have separate homes.
If you currently live in your flat and she lives in rented accommodation how come you are partners?

It's not an uncommon type of relationship and one I've heard others refer to as "LAT's" - Living Apart Together.