How to reduce tax on rental income

neetugopal

Thanks for confirmation Jimmo. I thought recent changes announced by the chanceller may affect my situation after April 2008.

wycliffe_2

I have read this thread with interest. I wonder if anyone can help with a particular query I have. A property is being gifted to me shortly by my father. The market value is £135000.00. I plan to rent it out. I want to reduce my income tax payable on the rent and release equity for other investments (as yet unknown) and plan to do this by taking a mortgage of about 80% of the value of the property. It seems that example 2 of 45700 would apply and that so long as I did not mortgage above the value of the property at the time it is put into my "letting business" I can offset the interest against the rent. However, I have two concerns:1 The property is not being purchased and therefore the cost to me is £0.00. Does this matter or is the value of the property the important figure?2. The property will never have been my PPR.I would be very grateful to receive comments, particularly as I have received advice that it will not be possible to offset the interest at all due to the £0.00 cost. I have therefore concerned purchasing it with a mortgage and cash depsoit and having the mortgage amount gift back to me by my father after the transfer has been completed. The problem with this is the increased costs, particularly the SDLT of £1350.00.

Anon

jimmo wrote: »

neetugopal

You will be ok. You need to have at least a basic understanding of bookkeeping to be able to follow the "logic" in BIM 45700. Treat yourself and your property letting business as two separate entities. Using the figures in example 2 from BIM 45700, when Mr A set up the property letting business he sold a property worth £375,000 to the lettings business for £375,000. However, no money changed hands. The business' financial position was then that it "owned" a property worth £375,000 and owed Mr A £375,000.

When Mr A decided to buy the flat in Rotterdam he said to the business "You currently owe me £375,000 for the property you are letting. I want £125,000 of that please."

The business now needs to raise/ borrow £125,000 in order to give the money to Mr A. It obtains this as a BTL mortgage and hands the cash to Mr A who then buys the flat in Rotterdam. The business has replaced part of the original loan from Mr A with a commercial loan on which it will have to pay interest. The new borrowing by the business is replacing some of the original borrowing to buy the property from Mr A and the interest is allowable.

In your case you did exactly the same thing except that, as the main creditor of the lettings business you said to it "As it happens I want the money to buy a new home and I am happy to guaranty your borrowing by offering my new home as security for your borrowing."

The lettings business borrowed the money, handed it over to you and you paid for your new home. The mortgage on your new home is an amount borrowed by the business to replace part of the loan you gave it to buy your previous home from you. The interest is therefore allowable.

This is all rather abstract because in reality you and the business are the same individual but I hope it makes sense. The capital account referred to in BIM is a measure of how much the business owes the proprietor, or how much the proprietor owes the business.

jimmo

A very interesting thread and a very clear explanation thank you to all. If I can add a hypothetical situation developing the scenario further (with apologies as using neetugopal's example as hijacking his/her thread - I will use "his" until perhaps told otherwise).

If neetugopal owned Property One in his own name (as bought when single) and transferred to the lettings business that he is now operating in his own name (and declaring on his own self-assessment), but Property Two (new home) has the new mortgage in joint names with his wife (I am painting a picture, stick with me!), would all the mortgage interest be allowable against Property One rental income, or only 50%?

Many thanks

Anon

MarkyMarkD

I think the answer is neither - i.e. none of it - as the two rental businesses are separate if their ownership is different. But Jimmo will doubtless provide a definit e answer.

silvercar

MarkyMarkD wrote: »

I think the answer is neither - i.e. none of it - as the two rental businesses are separate if their ownership is different. But Jimmo will doubtless provide a definit e answer.

How about if wife provided a letter agreeing to hubby taking out a (joint) mortgage on their home to fund his letting business?

MarkyMarkD

My wife already borrows money against our (joint) home using a (joint) mortgage to fund her (solely-owned) letting business. I don't see that as a problem at all.

I suppose that it WOULD work actually and I retract my previous opinion.

Following the general principle that it doesn't matter what property any loan is secured on, to be eligible for tax relief, then neetugopal could borrow money against the jointly owned property 2 in order to fund his own letting business in respect of property 1.

silvercar

Without any technical knowledge and only in the spirit of forum bantering,

Both parties to a joint mortgage are liable for the repayments, if one failed to pay (even went bankrupt or died) the lender would look to the other for repayment.

Does it automatically follow that taking a 200k mortgage means that 100k belongs to each party? The jointly owned equity could be used in any way that the parties agree, so it all could be directed towards one or others business. ie they agreed that she could fund her business by taking money from a jointly owned asset.

If I buy a car with money borrowed by a joint mortgage, the car is still all mine.

cantianella

Hi

I truly am a thicko so try not to blind me with science.

I own a right to buy high rise flat in Manchester that I bought 2 years ago. I have lived them for 4 years prior to buying it. At Christmas 2007 I moved to York to support a family member. I currently rent a house. I began to rent my flat out last May to help pay the mortgage. I have decided to stay here and so will try to get new tenants in my flat in May. Also I have put my flat up for sale.
Can anyone tell me how much tax about I should be paying? My mortgage is £150 on £28,000 over 25 years and my rental income is £427.50 after the management company take their fee.
Also what is capital gains tax - I have no idea - is there an implication for me if I sell my flat?
I'm worried - can anyone help?

MarkyMarkD

Jimmo/Silvercar I don't buy the argument about joint mortgages at all. It is irrelevant, for a married couple, what property the borrowing is secured on or whether the loan is in joint names or not. As far as I am concerned, we had a residential mortgage on our home in joint names and we owned our house in joint names. We (but in practice, my wife) then borrowed further money secured against that property, in order to fund my wife's letting business. The interest on the additional borrowing is wholely and exclusively to fund the letting business and is therefore an allowable expense against the rental income.

I can see that the scenario would be different if the borrowing was in the name of the wrong spouse; I would only push my scenario as being tax allowable where the mortgage is joint. But that applies in my situation, and it applied in Anon's scenario too.

MarkyMarkD

Your view is interesting but differs from our tax inspector's view as he has been made aware of the structure of the transaction from the start and accepts it as legitimate.

I don't honestly understand the view that any borrowing on the property is deemed to be 50:50. The borrowing is for whatever the borrowing is for - that's a matter of fact, not of assumption, surely. So if the borrowing is 100% wholely and exclusively to fund one spouse's letting business, the interest on that borrowing is a business expense of that letting business irrespective of how it is paid.

Another thought: given that it's accepted that it's irrelevant which property any borrowing is secured on, why should it be relevant whether the property the borrowing is secured on is jointly owned? And legally, if one spouse wants to use a jointly owned property as security for a loan, that's perfectly possible (with the consent of the other spouse) - it's common practice for directors of family companies to use their homes as security in this way, for example.