How to reduce tax on rental income

silvercar

cantianella,

CGT is payable on profits on the sale. As you lived in it as your home, you are exempt for the time it was your home and the last 3 years of ownership, so you have nothing to worry about for a few years.

You should declare the income on your tax return and pay tax on the profit. You are making about £3000 a year less expenses (upkeep, insurance gas certificate etc..) so you would include this on your return and pay tax at your marginal rate.

jamesd

jimmo, you're failing to split the business from the individuals.

The individuals remortgaged. Each individual lent the business the money. The business has an obligation to pay them interest on their individual loans or repay the loans.

For example, they could remortgage and each lend the business the proceeds. The business could then take out a BTL loan for 50% and repay one spouse their part of the loan.

Instead of the BTL mortgage the business owner spouse could borrow more money on the residential property and lend that to the business, making the BTL mortgage unnecessary. The business then uses the proceeds of that loan to repay their spouse. Now the spousal split of value in the residential loan outstanding is 75%:25%.

Iterate until the split is 100%:0%. Then do it all in a single mortgage transaction to reduce costs for the business, which would be expected to pay the costs of taking out 10,000 mortgages for ever-decreasing values.

MarkyMarkD

I prefer my analysis, which is that one spouse borrowed the money using a jointly owned property as security (and the fact that the loan is in joint names is an academic point) - but I appreciate the thought that's gone into your scenario, jamesd.

Anon

Thank you for your collective thoughts on this topic. Assuming that this is acceptable within the tax laws etc (borrowing money on new home but offsetting it against rental income). A couple of additional questions:

1. Would neetugopal have to formally inform the HMRC that is what he is doing, or would he simply include the appropriate figures in the accounts summary/tax return?
2. If the rental property is empty for a few months while the mortgage is still being paid, would this affect whether neetugopal could legitimately charge this against future rental?
3. If both Mr neetugopal and Mrs neetugopal both owned individual properties outright before moving to the new house, could they claim 50% each of the mortgage payments against respective rental income (or indeed in the % that they choose?).
4. If the mortgage was more than the rental income (as no doubt some people are stuck in this situation given the rise in property prices and mortgage rates but not reflected in rents) then could a loss be carried forward into the next financial year as it can only be counted against other rental income, but for how long?

Many thanks

Anon

jamesd

MarkyMarkD, lots of scenarios. Somehow the business has to pay for the money and insisting on it doing it at higher cost via a BTL mortgage is not of benefit to HMRC except if it changes the rules under people. Then it benefits only until people have switched to BTL mortgages and long term it loses out on business taxes because the business is now paying more for its borrowing.

silvercar

Anon wrote: »

Thank you for your collective thoughts on this topic. Assuming that this is acceptable within the tax laws etc (borrowing money on new home but offsetting it against rental income). A couple of additional questions:

1. Would neetugopal have to formally inform the HMRC that is what he is doing, or would he simply include the appropriate figures in the accounts summary/tax return?include figures in tax return and deal with queries if they happen.
2. If the rental property is empty for a few months while the mortgage is still being paid, would this affect whether neetugopal could legitimately charge this against future rental?makes no difference, unless th property is never rented between purchase and sale
3. If both Mr neetugopal and Mrs neetugopal both owned individual properties outright before moving to the new house, could they claim 50% each of the mortgage payments against respective rental income (or indeed in the % that they choose?).the assumption would be, for a jointly owned letting business, that all reciepts and expenditure are split 50:50, however individual bills are paid. on your tax return you would have identical entires and the box ticked that says "is this a jointly owned property" or similar words.
4. If the mortgage was more than the rental income (as no doubt some people are stuck in this situation given the rise in property prices and mortgage rates but not reflected in rents) then could a loss be carried forward into the next financial year as it can only be counted against other rental income, but for how long?carry it forward and then next year carry forward again, until such time as the rent does outstrip the mortgage. If it is never going to outstrip the mortgage then it begs the question, why not just sell up?

Many thanks

Anon

comments above.

jamesd

Anon, no need to inform except in the business books. Empty property is a loss of revenue for the business, which still has to pay interest on its borrowing. Each of the BTL properties can have a loan of up to 100% of its value at the time the business acquired it so 100% of both purchase prices would be OK; no need for a 50-50 split. Don't know how long the loss can be carried forward for.

One business owning both properties simplifies things since the voids and rental losses on one property can be offset against others before working out the overall profit or loss.

MarkyMarkD

Silvercar Regarding your comment 4, a lot of BTL landlords would have said "for the capital gain". That might be a dodgy basis nowadays.

chappers

When my accountant sorted my tax last year on our buy to let, he obviously took straight into account the mortgage on the property but also asked if we had secured any money against our existing property to buy the place . he offset the interest payments on the whole £57K we had secured against our own home. in fact thinking about it when I discussed this with him before we purchased I'm sure it was him who reminded me to take the £57k interest only.The rental is half mine with my business partner and our home is a joint mortgage with the wife.

sferguson91

Hi guys,

Firstly I would like to confirm I work for the revenue.

Secondly I am quite offended by the comments from Jimmo. Call centre we may well be, but we are not a privately run CC. I can assure you the majority of people 'currently' working in HMRC know what they are doing and I could only expect a comment like that from an old school member. I'm so glad we don't live in the 1950's any more.

Thirdly, Anon you are bang on with your explanation of the situation.

Any Q's - Please ask a CURRENT tax advisor!