How to reduce tax on rental income

mcost_2

Jimmo is right. Had you taken the morgage out on the first property you would be allowed interest on a mortgage up to the market value of the property when introduced to the rental business. ie market value when rental business started £80000, mortgage taken out on rental property £50,000. Interest relief on this mortgage would be allowable as taken out on the rental property and it wouldn't matter what you spent the money on. If the market value of the property increased to say £100,000 and you decided to increase your mortgage on this property to £80,000 the interest on the full £80,000 would be allowable as you would not have exceeded the market value of the rental property when it was first introduced into the business. Again it would not matter what you spent the money on you could claim the interest against your rental income.

As regards the ownership of the property. You could transfer the property into joint ownership as there would be no Capital Gains tax pay on transfer and then complete form 17 to say that your wife was going to receive all the rental income. She would then be responsible for this income and if she had no other income at all could use her personal tax allowance to cover it.

If and when you decided to sell the rental property you would both be due private reseidence relief to the date you left the property, the last 36 months of ownership would also be exempt (as this was once your main residence) and you would also be due letting relief for the period that fell between the date you left the property as your main residence and the last 36 months, again this is because this was once your main residence. There are limits attached to this letting relief.


All this information is contained on the HMRC website in their Capital Gains Manuals, there are also helpsheets available regarding Capital Gains and with regard to the rental mortgage interest details are in the Business Income Manual.

Obviously check all this out, but any accountant worth their salt would be able to confirm this. And with regard to the comments posted earlier about the HMRC call centres. They do a very good job and are very helpful. It may not always be what you want to hear but they don't make the rules.

neetugopal

Thanks Jimmo for a very useful reply. You are right I need to get some professional help as it is too complicated for me and don't want to make any mistakes. I might as well pay the HMRC as the tax due will be around £600. I was searching net and found "paragraph 45700 Inland Revenue" might apply in my case but was not sure. I was just trying to get advise from experts here to see if it apply in my case. I am almost convinced myself after Jimmo's reply that it does not apply in my case.

Thanks guys for your quick and useful replies.

neetugopal

You are right Jimmo that I was only talking about Income tax due for year 2006-07 (which I think I have to pay by Jan 2008) on the letting business.

I am not sure if we intend to keep the letting property for long that's why my comment regarding paying HMRC without investing too much into professional advice as it may be similar to the tax due (£600). However we have not 100% decided whether it is worth keeping the letting property for long time as returns are not so good now and house prices may come down but that's matter of other long discussion :-). I would definately consider taking profession help and remortaging letting property if we decide to keep it for longer period.

Regarding "paragraph 45700 Inland Revenue" I found information at http://www.propertytaxation.co.uk/info/a-property_tax_saving.html but in both test cases the letting property was remortgaged.

RabbitMad

To add my tuppence worth. I have recently done this (kept my old house and bought a new one)

I have off set 120k of the interest on my new mortgage against the old proprerty. I checked with HMRC as I wasn't sure and the advice I got was that this was OK cos the property was worth 160K. They mentioned something about overdrawing the capital of the business which would mean that I couldn't of set 160K of my new mortgage.

Second point. Is the property in Joint names already with your wife / husband / civil partner? If so you don't need to transfer the asset into a single name. You can elect that 99% of the asset belongs to the person with the lowest tax rate. Following year swap it if you like. (This only works with income generating assets. It wouldn't work if it was shares in a company that worked for and owned a substancial part of. In that case the dividend would be considered your income and swapping the asset would be caught under some mid 20th century anti avoidance measures that the tax man has recently dusted off and started using again)

I hope this helps and it is correcct (it is my understanding only and as they say a little knowledge is a dangerous thing)

neetugopal

Thanks Jimmo for all the links on HMRC web site. We can't always be up-to-date with new laws as Govt keep changing them so no need to be humbled.
I now feel more comfortable in offsetting mortgage interest for £80K from rental profit after reading BIM 45700. However it is mentioned that Mr A in example 2 remortgaged his existing flat and withdrawn the capital. In my case I have not done that but took mortgage on the new house but it should not matter, should it?

Thanks again

cash99

neetugopal wrote: »

Thanks Jimmo for all the links on HMRC web site. We can't always be up-to-date with new laws as Govt keep changing them so no need to be humbled.
I now feel more comfortable in offsetting mortgage interest for £80K from rental profit after reading BIM 45700. However it is mentioned that Mr A in example 2 remortgaged his existing flat and withdrawn the capital. In my case I have not done that but took mortgage on the new house but it should not matter, should it?

Thanks again

You should be fine. Its the principle of re-financing your lettings business that is important.

ajaxgeezer

I have nothing useful to add here except to say what a really nice guy neetugopal seems to be. It's great to see someone looking to do things 'properly' and honestly rather than lie/cheat and not declare, like so many people do.

neetugopal

Thanks cash99, jimmo again for great explanation and ajaxgeezer for kind words. This forum has been very helpful and I have more understanding of taxing than before. After all advise given here I can now confidently offset mortgage interest without having to worry doing anything illegal.

Now that I am clear about offsetting interest, I have few simple question regarding offsetting interest

1. Am I right in claiming the interest from the date I borrowed money for the new home? Mortgage on the new home started from 30th June, we moved out of letting home on 5th June.

2. Do I have to pass on any details regarding mortgage of £80K to HMRC? e.g. mortgage statements I receive monthly.

neetugopal

Thanks again Jimmo for a precise reply. I will keep all records/receipts as advised. I think this threat will be useful for other users.

neetugopal

I am reopening this thread as a little confused over recent capital gains changes announced by the government. My scenario is as below

Moved into currently rented property in Dec 2000
Moved out in July 2006 (main resident between Dec 2000 and June 2006)
Started renting out in Aug 2006 till date

I understand If I were to sell property before April 2008 then I don't have to pay CGT for the duration it was our main residence and three years after July 2006. Is it going to be the same after April 2008?

Thanks in advance for your replies