How to reduce tax on rental income

silvercar

if your new home was always your PPR for the whole time of ownership, there will be no CGT liability.

neetugopal

Last piece of advice from experts, I hope
I spoke to a friend of mine, who is also a LL, and he said it would not be possible to offset mortgage interest on mortgage taken on our new home against the rental income received on the rented property. The reason he gave was that the loan is not taken against the rented property. Below is my current situation

1. Renting out a property, which was our main residence between 2000 and 2006. No mortgage outstanding on it. Market value when started renting out £80K.
2. Bought a new home with £144K mortgage and moved in 2006.

Silvercar suggest that I should be able to offset mortgage interest on £80K as this was the market value of our old home, now rented out. I was a very happy chap until my friend said otherwise.

silvercar

if you had sold the first house you wouldn't have needed £80k of the mortgage as you could have bought for cash, correct? therefore the purpose of £80k of the loan was to fund your BTL and is allowable as a letting expense.

where (or if) it is secured is not relevant. people secure borrowing on anywhere, if the loan was small enough you could have taken an unsecured loan - still allowable.

may be worth employing an accountant to make sure you are getting all the allowances you are entitled to.

MarkyMarkD

Silvercar is 100% correct.

Based on my understanding, PeteMc is 100% wrong. Transfers between husband and wife are completely effective for tax purposes, even where their only purpose is tax minimisation. There is NOTHING to stop a spouse transferring assets to their spouse, tax free, and without crystallising any tax liability.

neetugopal

Thanks Marky and Silvercar for your replies. You have put my mind to rest.

alm721

I agree with Silvercar. We remortgagd our house a fewyears ago and borrowed an extra £80000 in order to purchase a buy to let property. So our current house has an extra 80K against it, while there is no mortgage on the buy to let. We offset the interest on the extra 80k we borrowed against rental income as that was the purpose of borrowing the extra money. We have never had a problem with this.

neetugopal

silvercar wrote: »

one of the purposes of the mortgage you took out in July 1996 was to retain your existing property to use as a BTL rather than sell it. As such the mortgage interest you pay on your current home, upto the value of the let property at the time you started letting it, is allowable against rental income.

it is the purpose of the loan, not where it is secured that counts. If you didn't have your rental property you would now be able to have a much smaller mortgage.

Mine's a pint!

I called Inland revenue to say that I am renting out a property now. The guy I spoke to said that I can't offset mortgage interest against rental income as the mortgage should have been on the rented property as opposed to new residence.

MarkyMarkD

Er, then that person at the Inland Revenue is stupid and wrong. Try phoning again and speaking to someone different who actually knows what they are talking about.

Having said that, it might be down to how you've explained the situation to them.

You need to be clear that you borrowed money, secured on your new property, in order to start your rental business, and that the amount of money you are seeking to offset interest expense against rental income is less than or equal to the value of the property on the date the rental business commenced.

Which property the loan is secured against is completely academic.

Elaine_Wilson

I can see where you're coming from Jimmo but I agree with Silvercar. I would present the situation like this.

The OP decided to move house and to start a lettings business with his original house. He therefore placed the house into the business and the business has an asset worth £80,000. This is balanced by a capital account owed to the proprietor of the same amount.

He now decided to buy another house to live in. To obtain funds to do so he withdraws £80,000 from his lettings business. The only problem is that the business does not have the cash so it needs to raise that amount. The cheapest way to raise this money is to tag it on to the mortgage on the new house.

Soi the funds were used in the business to enable the owner to withdraw his capital. Ultimately they were of course used to buy the new house but this has no bearing on the matter. So the interest can be deducted from the rent for tax purposes.

neetugopal

Thanks to Mark, Jimmo and Elaine Wilson for replying to my concern. It looks that I may not have explained myself very well to HMRC as I don't know much about taxing and call centre guys have limited knowledge too.

I think I should take services of a tax accountant to make sure I am using all tax relief available to me under BTL business. I am on PAYE and just have to file return for this property. Would somebody let me know how much I expect to pay an account to file tax returns and advise.

Many thanks