Capital Gains on 2nd rented out home

goalhanger

This is probably why , as an engineer I'm poor ;-(

purdyoaten

holly_hobby wrote: »

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

Hi Holly. While more than happy to bow to what certainly seems superior knowledge to mine, I came across a case a few years back where HMRC challenged a claim for lettings relief as the letting was on a non-commercial basis. A tax case was used as precedent but, for the life of me, cannot remember it. This link suggests similar.

http://www.accountingweb.co.uk/anyanswers/lettings-relief-available-period-occupancy-daughter

Any thoughts?

purdyoaten

00ec25 wrote: »

http://www.hmrc.gov.uk/manuals/cgmanual/cg64713.htm

Owen v Elliott in which he said,

“No relevant distinction can be drawn between a letting to an undergraduate nurse or lodger, such as the judge thought would be entitled to relief, and a letting to anyone else. All are lettings of residential accommodation indistinguishable from that which is provided by boarding or guest houses or indeed by hotels, and all are conducted on what the judge called ‘a commercial basis’.”

It is clear from this that the judge considered that for the purpose of lettings relief letting must be conducted on a commercial basis.

That was quick! That was the one!

holly_hobby

Not sure of the point being made (and admit to no having read the link provided before submitting this post). But lettings relief is available where the property prior to disposal has acted as the individuals primary residence and has been let, this would be a commerical (ie business) arrangement (perhaps its my phrase thats muddied the waters), but by commerical let, I essentially just mean that there has been a formal tenancy arrangement in place at some point ie occupancy in exchange for rent or provision of other services, which would essentially amount to consideration.

This is not the same as where the property has simply been occupied for free (ie not in return for any consideration or rental income) by either a family member (as in this case) or indeed anyone else, as that isn't a tenancy arrrangement, but a tacit agreement to occupy instead.

I do think that if there has been no rental receipts from Dad and/or no rental income declared for IT, that HMRC would certainly challenge an application for lettings relief (especially if it wipes out a sizeable and otherwise taxable gain) - and although I work within the financial advice arena, I am not a dedicated tax practitioner, so happy to be corrected if reqd (probably by the lovely JIMMO, who's a retired HMRC cgt inspector, so having spent yrs dealing with cgt reviews/investigations knows his eggs).

If thats the case, then the OP may be better advised if possible (subject to the above requirements in claiming residency), to just claim standard PRR instead exemptions, where if succesfull he can at least offset the last 36 or 18 mths of gain (depending upon when the sale completes) along with unused annual cgt exemptions (£10,900 pp 13/14 or £11k pp 14/15) and reported losses.

Hope this helps

Hollyxx

jamesd

Maybe the tax case was inheritance tax, where the rent should be a market rent if a property is to be excluded from the estate for IHT after being gifted by the former owner, now occupant, usually parent of the recipient of the gift?

holly_hobby

Hi James,

That would be GWR/POAT regs, where very broadly speaking if market rent is not paid and the differential to market rent exceeds 5k per related person, its added to their income and they are taxed on it at their marginal rate or other elections re IHT can be made

When I get a min I'll read through the link and see what its in ref to.

Holly x

00ec25

holly_hobby wrote: »

Not sure of the point being made

the point being made was that OP describes the occupation by his parents as being for a peppercorn rent. Purdyoaten has therefore correctly questioned whether lettings relief would be available (once the OP moves into the property to attain PRR of course) on the basis that by that stage the only letting history may not be viewed as having taken place on a commercial basis and therefore lettings relief would be disallowed even if PRR was not.

the issue for the OP would therefore be whether the peppercorn rent did in fact constitute a commercial letting as a similar level of rent would not have been paid by a non relative and therefore the commerciality of the lettings business, in the absence of an associated history of letting to any other type of tenant, could be questionable

we will await Jimmo's pronouncement with baited breath

the link is the CGT manual referring specifically to the eligibility for lettings relief in the context of properties with private residence relief "Private residence relief: letting: meaning of let as residential accommodation" in which HMRC's opinion is "Relief is not available where the arrangement is not made on a commercial basis."

http://www.hmrc.gov.uk/manuals/cgmanual/cg64713.htm

holly_hobby

Ah I get you - just re-read the OPs ealier post and see Dad has paid and pays a PCR, Jimmo's certainly the best person to clarify ... he'll pop up soon

TBH, and without any negative conatation, I assumed you were also a HMRC tax administrator/financial adivser ... but if not, agree Jimmo the absolute HMRC oracle will cetaintly advise ...

H xx

purdyoaten

holly_hobby wrote: »

Ah I get you - just re-read the OPs ealier post and see Dad has paid and pays a PCR, Jimmo's certainly the best person to clarify ... he'll pop up soon

H x

Thanks for your help. If I had not heard about the hmrc challenge I would not have known anything about this - as happens from time to time.

goalhanger

This is fascinating , trying to take all this in.