Capital Gains on 2nd rented out home

goalhanger

yes, we did do a few improvements, including a new front door, kitchen and conservatory plus all the soffits etc in plastic . It all helps ....

holly_hobby

Ok, if it will never have acted as your primary residence at any point from ownership pre disposal, then your only available exemption is your personal unused annual capital gains tax allowance, which is £10,900 2013/14 increasing to £11,000 2014/15 per person (no carry forward or sharing of unused allowance permitted).

The actual CGT computation will be based on the difference between the market value at inheritance and the disposal capital achieved LESS any improvement costs (not general maintenance - of which HMRC will typically require documentary evidence), associated acquisition/disposal and professional fees (not those involved in reporting of CGT liability), and any previously reported CGT losses by each beneficial owner.

You report the transaction (your individual proceeds/liability etc) via your individual annual self assessments.

Hope this helps

Holly

jamesd

Best to read about Letting Relief. Are you so keen to avoid ever living there that you're willing to pay £32,000 in avoidable tax to avoid it? That's a lot of money to pay to avoid living in a place for say three or six months!

Perhaps you might sell your own and move in there for a while so you don't get disturbed by viewings? Perhaps while you look for some other place? Or just move in for a while and leave your own place empty, being sure that relevant HMRC, Council Tax< Electoral Roll and other addresses show the change of address.

If you don't really want to sell, you can mortage the property to release capital.

goalhanger

I didnt think i could live there for a while and avoid CGT ? I thought it would count from when I moved in ? That would be too easy ....wouldnt it ?
I am willing to consider this as we intend to move at some point anyway.
Phil

jamesd

It really is that easy, provided:

1. It's been your home at some point.
2. It's been let at some point.

Have a read of this HMRC example. It's also available when only part of the house has been let, perhaps if you're living in part of it.

If you're not going to be eligible for letting relief, perhaps because no rent has been or ever will be paid, the next option is the old standard Principal Private Residence Relief. That just depends on you having lived there for a while. Under current rules, roughly, the total gain from the time you bought it to the time you sell it is split between the time you didn't live there and the time you did, but with a bonus: you get three years added to the time you lived there to increase your benefit. There's a plan to reduce that to 18 months in a year and a bit.

So yes, it's easy to gain a lot by living there for a while, just a case of which gain(s) to go for and sorting out the mechanics. It's the sort of thing a decent accountant who's familiar with buy to let can help you with if you say you're willing to live there for a while and perhaps also willing to let it out for a while. It's really easy for an accountant's modest fee to make you far more than the cost in cases like this!

holly_hobby

If you get away with it being classed as your primary residence and so coming under PRR regs, you'll also get in addition to lettings relief (LR being a max of 40k per beneificial owner ie 80k for a couple AND if the propety HAS been commercially let ), and if you dispose pre 5 April 2014, gains during the last 36 mths of ownership exempt (regardless of your residency), or if you sell after 6 April 2014, the last 18 mths will be excluded following recent HMRC amendment.

The issue will be whether you wish and can also genuinely make this unit into your primary home, which may involve providing such evidence to HMRC as all your banking/financial accounts etc are registered there, you are on the votors roll, you are registed and pay utilities there (with evidence of normal family use), address registered with HMRC/employer, etc not exhaustive, and the list goes on .... essentially they can ask for what they deem necessary to evidence your PRR qualification (as you also need to primarily qualify for PRR at some point during ownership, to be able to take advantage of lettings relief as discussed by James, along with of course possible evidence of its let ie along the yrs also declaring net rental income from Dad to HMRC)

Hope this helps

Holly

PS - HMRC link re lettings relief for your ref - http://www.hmrc.gov.uk/manuals/cgmanual/cg64710.htm

goalhanger

This all sounds interesting, thank you all so much . I cant see any reason not to use it for a while , it may even he helpful other than for financial reasons. Looking at buying my father a small retirement flat and if I rent it to him i can get it on buy-to-let interest only . Strangely this will work out much better that simply renting the flat...
Oh dear, my head is spinning - need a glass of wine , well it is Friday.
Thanks again for all your help. Thinnk i need a chat with the wife now ;-)
Phil

jamesd

Soon you may be able to say that the folks at MSE saved you £32,000... Not a bad return for asking a question.

jamesd

When it comes to buying the flat for your father, it's worth knowing that:

1. for BTL property you can deduct the mortgage interest from the rental income when calculating how much income tax is due on the rent.
2. the mortgage doesn't have to be secured on the BTL property.

Because BTL mortgages are more costly than standard residential mortgages it can be very beneficial to have a larger mortgage secured on your new home to avoid having a or as much BTL mortgage on the let one. The security makes no difference at all to the tax deduction.

However, this is also an area where it's wise to have an accountant work out exactly how to arrange things, because it's easy to get it wrong and not have the interest deductible if you do it wrongly. The lower mortgage interest rate part is easy, the interest deductibility is easy to get wrong.

holly_hobby

Thats correct, the associated business loan does not need to be secured on the business asset (ie Dads flat) - it can be on your own home, but there must be a clear audit trail to demonstrate the capital source, loan and injection into the business.

To be crystal, it is only the actual element of your residential mortgage (and associated interest) directly used to pch or finance (ie capital injection) into the business (ie the BTL unit) that is a permitted HMRC tax deduction.

ie you have a property worth 500k with an existing mge of 100k, you obtain a further advance of 150k to pch Dads flat. You now have a total mge of 250k, BUT only the mge interest on the further advance of 150k (wholly used to pch the BTL unit) is a permitted deduction. (to which your mge lender would on request, be able to give you an annual interest statement for application against your rental income returns).

Its pretty simple TBH, your accountant will guide, or come back here if needed.

Hope this helps

Holly xx