How to reduce tax on rental income

jamesd

1. All of the mortgage costs up to the value of the property at the time it entered the letting business can be charged to the business and offset against revenue.
2. You'd need valuations and for prudence you should also collect Land Registry and advertised price data at the time of the valuation.
3. It's the value at the time the property was transferred to the letting business, so subsequent value changes have no effect.
4. Check with someone other than me but I think no practical limit on carrying forward losses.

RainMaker_2

Interesting thread. May I run this scenario past the wizards here...

Mr A & Mrs B (married to each other) jointly own a number of BTL properties. The total income is £ 30k, with finance charges of £ 10k, producing a profit of £ 20k. Mr. A as a higher rate payer pays (20/2 x 40%) £ 4k income tax. Mrs B. being a basic rate payer pays (20/2 x 20%) £ 2k income tax. Income tax bill (£ 4k + £ 2k) £ 6k.

They decide to form a Ltd management Company, with Mrs. B being the sole shareholder and director. Mr A & Mrs B then let all BTL properties to the management company for £ 10k p.a. (well below commercial rental value) and effectively negate any personal income tax liability (now only £ 10k income and still £ 10k finance charges).

Ltd Management Company then sub-lets these properties to tenants for £ 30k and (after paying rents to Mr.A & Mrs.B of £ 10k) makes a profit of £ 20k and pays corporation tax bill (£ 20k x 21%) £ 4.2k.

The actual figures aren't really important. But would this in principle be allowable ? If not, why not ? TIA

Anon

jamesd wrote: »

1. All of the costs can be charged to the business and offset against revenue.
2. You'd need valuations and for prudence you should also collect Land Registry and advertised price data at the time of the valuation.
3. It's the value at the time the property was transferred to the letting business, so subsequent value changes have no effect.
4. Check with someone other than me but I think no practical limit on carrying forward losses.

1. Is this correct? According to the Property Income Manual (HMRC) PIM2205:

http://www.hmrc.gov.uk/manuals/pimmanual/PIM2205.htm

Expenditure on professional fees of a revenue nature is deductible if they are incurred for the purposes of the rental business. Professional fees are not allowable if they are capital or they are not incurred wholly and exclusively for the purposes of the rental business. Generally, the fees are capital if they relate to a capital matter, such as the purchase of property.

2. If you haven't valuation data, if all the houses are near identical, and any on the market/sold at the time were sold for nearly the same price, could you use that data (from Land Registry) as the basis of the valuation, as that would be as accurate as someone having an estate agent value it?

Final check (as tax returns are due). Where you are wanting to claim the loan repayments secured against a different property (BIM45700 principle from Example 2 as discussed in this thread) is it correct that the financials (expenditure) are included in the tax return and you do not need to include an explanation that you are following the basis identified in BIM45700?

Many thanks

Anon

jamesd

"PIM2066 - Deductions: General rules: Main types of expenses: Fees for loan finance etc.

Costs incurred in obtaining loan finance for a rental business are generally deductible in computing rental business profits provided they relate wholly and exclusively to property let out on a commercial basis (see PIM2005). These costs include loan fees, commissions, guarantee fees and fees in connection with the security of a loan, (ICTA88/S77 or ITTOIA05/S272)."

Solicitors fees for the initial purchase would be part of the capital calculations, not the income calculations. But what was being asked about here was mortgage arrangement fees and those covered as part of the income calculations.

Anon

jamesd wrote: »

"PIM2066 - Deductions: General rules: Main types of expenses: Fees for loan finance etc.

Costs incurred in obtaining loan finance for a rental business are generally deductible in computing rental business profits provided they relate wholly and exclusively to property let out on a commercial basis (see PIM2005). These costs include loan fees, commissions, guarantee fees and fees in connection with the security of a loan, (ICTA88/S77 or ITTOIA05/S272)."

Solicitors fees for the initial purchase would be part of the capital calculations, not the income calculations. But what was being asked about here was mortgage arrangement fees and those covered as part of the income calculations.

Thank you jamesd.

A scenario - If Partner A owns one property and Partner B owns the other, and they take out a mortgage on their home to buy into the business (principles outlined above), then as they can do what they want could they split the loan, say 25%/75% (to reflect the relative equity values of the properties) to claim this back against the rental income?

If the answer to this is yes. A few years down the line, Partner A, a higher rate tax payer, decides to transfer the property to Partner B, a lower rate tax payer (no gain/loss as married) to legally make the best use of the tax allowances - could they also then transfer the loan to Partner B (effectively, Partner A "paying back" the money into the business and Partner B then taking on the business or similar)?

If Partner As rental business has come to an end as a result of the above, they can tick a box on the self-assessment form but would they also need to add commentary to say why or would HMRC simply not expect that page in future years?

Many thanks

Anon

jamesd

Anon wrote: »

A scenario - If Partner A owns one property and Partner B owns the other, and they take out a mortgage on their home to buy into the business (principles outlined above), then as they can do what they want could they split the loan, say 25%/75% (to reflect the relative equity values of the properties) to claim this back against the rental income?

The couple can take out a mortgage. They can lend letting business A 25% and letting business B 75% and the letting businesses can offset the interest against rental income.

Anon wrote: »

A few years down the line, Partner A, a higher rate tax payer, decides to transfer the property to Partner B, a lower rate tax payer (no gain/loss as married) to legally make the best use of the tax allowances - could they also then transfer the loan to Partner B (effectively, Partner A "paying back" the money into the business and Partner B then taking on the business or similar)?

If the letting business A is gifted to partner B then partner B owns that business and any income on it after deduction of interest from rent. There's no independent transfer of the loan from partner A to partner B since the loan is attached to business A and automatically transfers when business A is transferred.

Anon wrote: »

If Partner As rental business has come to an end as a result of the above, they can tick a box on the self-assessment form but would they also need to add commentary to say why or would HMRC simply not expect that page in future years?

Telling HMRC beats having someone at HMRC wondering and starting an investigation.

Anon

jamesd wrote: »

Telling HMRC beats having someone at HMRC wondering and starting an investigation.

So tick the box and explaining exactly who it has been transferred to? Makes sense I suppose - and they would know already as there is a form to fill in when submitting the transfer form to land registry, so know when a property has been transferred.

I was just having a scout about and came across reference to PIM2105 (http://www.hmrc.gov.uk/manuals/pimmanual/PIM2105.htm). It includes the statement:

The normal rental business rules apply, see PIM2000 onwards, including the ‘wholly and exclusively’ rule and the rules governing the timing of relief (see PIM1100 onwards). A taxpayer cannot, for example, deduct interest on a private loan, such as a loan used to buy their private residence. Where part of the taxpayer’s own residence is let see PIM2120.

Does this cancel out the above discussion about BIM45700? Also, if including the mortgage arrangement fee, can this go in one year or does it need spreading across the length of the loan?

Many thanks

Anon

jamesd

Anon wrote: »

Does this cancel out the above discussion about BIM45700?

No, because it's referring to a private loan, not for money lent to the letting business. The situation is:

Homeowner gets private mortgage on their home. Not deductible interest.

Homeowner lends the letting business the mortgage money. Interest and fees deductible from business income, including the mortgage arrangement fees.

You need to be careful to think of "me" and "letting business" as two different entities.

Anon wrote: »

Also, if including the mortgage arrangement fee, can this go in one year or does it need spreading across the length of the loan?

One year.

MarkyMarkD

I don't think your explanation helps, jamesd.

If the homeowner and the letting business were separate entities in the way you describe, the homeowner would have a taxable income of the interest, which wouldn't be offsettable against the mortgage interest.

It's better to say that the letting business "arm" of the homeowner is borrowing the money for the letting business, secured against the residential property. That's why the interest is allowable.

It doesn't matter whether the letting business "arm" of the homeowner borrows the money when the letting business starts, or whether the homeowner already had the loan - effectively the loan can be transferred across to the letting business when it requires the money.

Anon

You have all been so helpful so far - many thanks.

Continuing this thread further, if you were to pay an early repayment charge (redemption penalty) on the loan to switch to a different/cheaper product, could you include this against rental income (in this scenario, over the period of the fix it would reduce the overall amount of interest, including the redemption, compared to carrying on with the current fixed interest rate)? I just read an article on Thisismoney whihc highlighted the potential savings (see http://www.thisismoney.co.uk/mortgages/mortgages/article.html?in_article_id=471317&in_page_id=58), which is referring to a normal mortgage situation, but the principle is the same - a substantial interest saving over the same period.

Many thanks

Anon