any tax boffins out there?

susiefloozy

Hi, I'm new to this, so sorry If I don't explain myself very well, or I'm waffling!

Ok- My query is regarding renting, capital gains tax, whether i'll be liable, and how I can get round it/reduce it, if I am.

My boyfriend is a homeowner, and I had begun the process of buying my own flat, when ho hum, life changed and I fell pregnant .(nice surprise!)
Living seperately wasn't really an option anymore, as you can imagine and so I moved in with him. We talked about it, and decided that I would carry on with the sale of my flat and we are going to let it out once it comes through next month or so. The view is, that we could make a profit from the resale of we held onto it for 2 years or so.
The flat is completely in my name, and I'm not on my boyfriends mortgage or anything, so I guess that legally, reponsibility for it will be mine completely. We've worked out that the rent won't cover the entire costs to run it, and I'll be paying around £100 per month to keep it up. So my first question is:

Am I right in thinking I won't have to pay any tax on the rental income- seeing as there isn't any to speak of?

Also- if I made say, £15,000 from the sale in 2 years, having never lived in the property, how much capital gains would I be liable to pay?
If it was alot- is there anything that I could do at this point to reduce it?

Thanks alot for your help!

gazhawkins

Capital gains tax threshold is roughly 9000 quid in a given tax year.

Which in your case, would mean that you would be liable for CGT on any capital gain above 9000 quid or so, about 6000 quid.

If the house was your PRIMARY residence (ie your only property and you're living in it) then it is not subject to CGT.

susiefloozy

Thanks gaz

I don't think I could realistically live in the flat now, as it's dead small and we've a baby on the way. Im only surmising that our profit wouldbe 15k- it could be more, it could be zilch!
But there any other way we could get around it? Or is living in it the only way? How long do I reasonably have to live there for, and would this be BEFORE I rent it out, or could I say, rent it out now, then live in it for a time before I sell it on?

Thanks in advance

Inexpensive_lady

Hi Susie

Congratulations on becoming pregnant!

The two reliefs from Capital Gains Tax most applicable to you are Principal Private Residence Relief - PPR, and letting relief. To be eligible for letting relief you must be eligible for PPR, and to be eligible for PPR you must have OCCUPIED the property as your PRINCIPAL private residence at some point throughout the period of ownership (though not necessarily all of it).

The problem arises as HMRC will not give an indication of how long you need to occupy the property before they will consider it "occupied". In theory, if you slept there one night you could argue "occupation", however they would be very unlikely to accept that.

If you did want to take advantage of PPR later on, then personally I would live in the property for at least a month, or as long as is feasible, staying there on average at least 4 nights a week, open accounts with utility providers (gas, water, electricity etc including TV licence), keep those receipts, and move furniture etc in.

I understand that it is a hassle, but the only way to benefit from PPR. This initial period of occupation would then entitle you to PPR, the level of which depends on your period of actual occupation (ie the month(s) you did live there) and your periods of "deemed occupation". You would be entitled to 3 years of deemed occupation automatically, and then it gets a little bit complicated about what entitles you to deemed occupation. The legislation sets it out (Taxation Chargeable Gains Act 1992, sections 222-223, I think).

Letting relief is another story, and only kicks in for the periods when the period is let and not under deemed occupation. I am not going to try and explain that one here.

Now let's assume for a moment that you do sell your property in the future, and with or without PPR a gain arises.

gazhawkins correctly identifed that you have an annual exemption from cgt, which for 2007-2008 is £9200, and rises in each budget roughly in line with inflation. This is for each person, not the asset. This means that you do not pay tax on the first 9200 of the gain. Additionally you also receive a personal allowance, which for 2007-2008 is £5225. If you were not working to look after the baby, you would also be able to use your personal allowance to reduce the gain chargeable (assuming no other income).

I quickly want to raise a point on equalising assets = sharing the property between you and your boyfriend's name on the deeds. This could be good in theory, as then he would also be able to use his annual exemption of 9200, thus reducing the gain further. He would be unlikely to be able to use any personal allowance if he had income from employment. However, to put his name on the deed, you would effectively be giving him half of the property. This may give rise to a chargeable gain in itself as the gifting of an asset is what is called a "chargeable disposal". There is a way to avoid this - get married. Spousal transfers are exempt from cgt, and also inheritance tax, should one of you die (sorry to be morbid).

And sorry to be a tax "boffin", but you questioned whether you would have to pay tax on rental income, even though you would actually be putting more money into the mortgage, and the answer is not a simple "no". I did say sorry!

You pay tax on the rental income, less allowable expenses. See http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnPropertyAndRentalIncome/DG_10013435

The direct.gov website is actually quite good on tax, but it is a big subject, so some parts are covered better than others.

I have spent a long time trying to make sure that what I have written is correct, but please do check with a professional who can give you the correct advice for your specific situation, and most of all, good luck!

susiefloozy

Thanks alot, inexpensive girl and Jimmo. I appreciate the time you've taken to help me. I hope you don't mind answering a few more questions.....

I'm feeling a bit worried about the whole thing now to be honest. I know this may sound naive- but I never really anticipated all this. I just thought I could rent it out, get most of the mortgage covered, then sell it on in 2 years or so and make a bit of money. I didn't think I'd have to get into declaring income on the rental, as effectively, i'll be out of pocket by around £100 pm.

How do I go about setting myself up with the IR, - to let them know I intend to let it out etc? Are the tax return forms complicated?
Does this have to be done reguarly, and how do I prove that there is no profit being made?
Also- will any of this affect the way my salary is currently taxed, or is it considered a seperate thing?

I'm in full time employment (teacher) and not on a vast fortune, neither is my bf- so I'll be heading back to work when baby is 6 months. I was hoping to try and get tax credits towards childcare costs- do you know if having the property will affect my ability to claim this- even though there is no profit form the rent?

With regards to the private residence- I see that you think it isn't as simple as just moving in temporarily. I've read advice saying that if I moved in for a month or so before I sold it, I might be able to get round the tax, especially if I sold it within 2 years of owning it. (isn't there some 3 year relief or something?)
Anyway, from what you say, that doesn't seem possible.

wooosh! Sorry to bombard you- I'm wondering if it's all worth it now. I'm not expecting to gain a vast fortune on the flat, perhaps 15k if I sold within 2 years, (and we were lucky of course!). Do you think It might be better to just accept that if my personal allowance is 9k or so, then I'll have to pay CTG on the rest and be done with it?

Thanks again!

susiefloozy

another thing (sorry!:o )

I've been looking on that website link that inexpensive girl recommended (thanks for that) and read that If I'm making a loss on letting the property - which I will be by around 100 per month, I'll be able to offset that against any gain I make.

Is this right? Because I'm thinking that, if I was allowed to offset this loss, then it could reduce the bill quite a bit, along with my personal allowance, and would save me a alot of worry regarding moving etc.

Are there other allowances I could use? I hope I've got this right!

dontshootthemessenger

Hi Suzie,

Please believe that I write this message out of concern for you. I don't offer any direct advice but hope to provide you with enough information to encourage you to properly research ALL aspects of this undertaking.

In all the messages so far posted, various solutions have been suggested to the problem of dealing with capital gains tax. None of them has dealt with a possibility that, on the cusp of starting a family, you really ought to consider. There is one scenario in which capital gains tax can be completely avoided but there is a very nasty catch - namely that there is no capital gain to be taxed.

At the moment, investing in property seems to be a one-way bet - property can only ever go up in value. This is always true... except when it's not (89-95 for example). The reason I am concerned is that it sounds as though you and your partner have a perfectly nice place to live and a baby on the way, but you are planning on subsidizing the purchase of a property that you don't actually need to the tune of £100 per month, at a time when in many parts of the country property values are stagnating or even falling (check out the UK Land Registry web site for the actual figures).

The anecdotal evidence I have come across suggests that the types of properties that seem to be suffering the most are small buy-to-let investments, like the one you are planning on buying. This is because 'everyone is now doing it', leading in many cases to a glut of properties all competing for the same (more or less fixed) rental market.

This is a trend which I fear is likely to get far worse before it gets better because for many, property is now bought primarily because of its growth potential. When this happens, it is very easy for investors to become divorced from the financial reality of their 'investment' and to only consider what they will do with their new found riches a few years from now. They therefore do things like subsidizing rental incomes (think about it for a second; does it REALLY make sense?), ignore costs such as maintenance (the responsibility of the landlord) and forget about void periods where the property is not let but the mortgage still has to be paid.

Eventually the penny drops and investors start trying to pull out. However to sell they need a buyer. If enough people can see what is happening, a buyer at the right price can be impossible to find and so the only option available is to drop (yes drop!) the price until someone is willing to buy. Depending on where you are planning to buy, this may already have begun, it may happen soon, or it may not happen for a number of years. The one thing you can be certain of is that at some point it WILL happen.

If this happens over the timeframe of your investment you could find yourself in real financial difficulties, since after two years you will already have lost £2400 in subsidized rent and may be faced with having to sell the property at a price that cannot even repay the loan you took out to pay for it in the first place. Not such a great 'investment' in this scenario.

Alternatively, property prices may continue their upward trajectory for a number of years, and you could end up with a very tidy sum at just the right time to start worrying about nursery costs. As billposter adverts for share based investments say in the smallprint (and I paraphrase slightly), 'Past performance is no guarantee of future returns. The value of investments may go down as well as up'.

At the end of the day, only you and your partner can decide what level of risk you are prepared to take. Please just be aware that buy-to-let IS a risk, especailly at the moment, and make sure that you do your research properly before jumping in with all of the other new landlords who are jostling to secure their pension.

Whatever you decide to do, I wish you the very best and hope that you and your family have a happy, healthy and financially secure future.

dstm

caveatvenditor

Its Easy. Pay rent to your boyfriend to live in his house and you won't need to bother with CGT on your own property.

Daddy_Bear_2

I would read these two articles and try and understand why buying a flat to rent now is a very bad idea. Possibly the worst financial decision you could ever make.

An Observer article and one from The Economist;

http://observer.guardian.co.uk/comment/story/0,,2073503,00.html

http://www.economist.com/world/britain/displaystory.cfm?story_id=9117024

susiefloozy

Jimmo (you know your stuff eh?:T )

I want to thank you for your help, but I'm being very dozy and can't see the icon- where is it? (:o )
I think I'm getting to grips with what you say- that I have to consider the letting income as totally seperate from any gain I make on the property.

Jimmo- when you say that I don't have to declare any losses to the IR- does that mean that I don't actually have to send off yearly tax return thingys?
I thought I had to declare to the IR that I intend to set myself up as a landlord?

Daddybear - thank you also for taking the time to offer your advice- you're right that I do wonder if I'm doing the right thing. My reasoning behind it really, is that the flat itself was going relatively cheap (100k) in an area where there seems to be little else on offer for that price.(it's a newbuild- no one else has lived there before)
There does seem to be a bit of a saturation point with flats in the area at the minute, but as I say, I kind of felt inspired by its lower price, and felt that we could make a bit back. We're not really looking to make a fortune, if you see what I mean.

I guess I am a bit green about the whole property thing- do you really think it's a terrible idea?

susiefloozy

caveat

I don't understand- do you mean that if I'm paying rent somewhere else then I don't have to pay cgt on my property?