Primary residencerental property tax implications
Discussion
Hi all – I’m after a little bit of tax advice regarding a house I own.
Bought originally as a residential property and lived in by myself for 2.5 years. Relocation meant that the property has since been let out. Empty property, let through agents and permission of lender granted for that purpose.
I benefit from a longstanding favourable tracker rate but in turn it means that interest to offset against net rental income is minimal. I appreciate I can offset interest payments, my letting agent fees, the cost of EPC’s, gas safety checks etc against the rental income for tax purposes. I have not incurred any maintenance to offset over the tax year thus far.
My employers have always taken care of my PAYE tax previously and I’ve never entered the echelons of needing to complete a self-assessment insofar as employed earnings as concerned. Do I simply need to download and complete a self-assessment form? I’ve heard the reminders towards the end of the tax year on the radio but realistically when do I need to complete the form? Do I need an accountant to hold my hand? (or, perhaps more of interest, can an accountant assist in minimising tax liability or is this so transparent /simple that it would be disproportionate to pay an accountant to possibly shave 30p off the bill for claiming a tin of paint as a deductable expense...)
Also, what is the situation re CGT? Do I need to consider this at all given the house was purchased as a primary residence and I’m renting in my new location? Would such a situation last indefinitely (thinking about tapered CGT on a BTL..)? Would the situation alter should I decide I wanted to buy elsewhere but kept ownership of the old house?
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Many thanks in anticipation and apologies for any symbols added by posting via iPhone!
Bought originally as a residential property and lived in by myself for 2.5 years. Relocation meant that the property has since been let out. Empty property, let through agents and permission of lender granted for that purpose.
I benefit from a longstanding favourable tracker rate but in turn it means that interest to offset against net rental income is minimal. I appreciate I can offset interest payments, my letting agent fees, the cost of EPC’s, gas safety checks etc against the rental income for tax purposes. I have not incurred any maintenance to offset over the tax year thus far.
My employers have always taken care of my PAYE tax previously and I’ve never entered the echelons of needing to complete a self-assessment insofar as employed earnings as concerned. Do I simply need to download and complete a self-assessment form? I’ve heard the reminders towards the end of the tax year on the radio but realistically when do I need to complete the form? Do I need an accountant to hold my hand? (or, perhaps more of interest, can an accountant assist in minimising tax liability or is this so transparent /simple that it would be disproportionate to pay an accountant to possibly shave 30p off the bill for claiming a tin of paint as a deductable expense...)
Also, what is the situation re CGT? Do I need to consider this at all given the house was purchased as a primary residence and I’m renting in my new location? Would such a situation last indefinitely (thinking about tapered CGT on a BTL..)? Would the situation alter should I decide I wanted to buy elsewhere but kept ownership of the old house?
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Many thanks in anticipation and apologies for any symbols added by posting via iPhone!
http://www.hmrc.gov.uk/forms/sa105.pdf
http://www.hmrc.gov.uk/worksheets/sa105-notes.pdf
will help on the tax front for the income from the rent
http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Ta...
will help re CGT implications
You should also be sure that you are within the terms of your mortgage
http://www.hmrc.gov.uk/worksheets/sa105-notes.pdf
will help on the tax front for the income from the rent
http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Ta...
will help re CGT implications
You should also be sure that you are within the terms of your mortgage
Your post is full of odd artefacts which make it difficult for me to read.
When you were relocated due to your job, did you purchase a second property to live or did you live in rented accomodation or was the accomodation supplied by the employer?
Disd you rent out your original property after you had to moved out of it?
When you were relocated due to your job, did you purchase a second property to live or did you live in rented accomodation or was the accomodation supplied by the employer?
Disd you rent out your original property after you had to moved out of it?
Eric Mc said:
Your post is full of odd artefacts which make it difficult for me to read.
When you were relocated due to your job, did you purchase a second property to live or did you live in rented accomodation or was the accomodation supplied by the employer?
Disd you rent out your original property after you had to moved out of it?
Apologies Eric, as I said in the footing, posting on an iphone seems to add some very odd symbols! When you were relocated due to your job, did you purchase a second property to live or did you live in rented accomodation or was the accomodation supplied by the employer?
Disd you rent out your original property after you had to moved out of it?
Not purchased a second property as yet, currently in rented. No plans to buy in immediate future but that may change (and presumably will alter the tax situation re CGT on property '1' by implication of your question?)
Yes, rented out property after I had vacated it.
Right, first the good news.
You bought it in November 2007. You have therfore owned it for almost exactly 3 years.
If you sold it tomorrow, if there was any sort of Capital Gain on disposal (which may be unlikely), the gain would be completely exempt from Capital Gains Tax.
Now the (not so) bad news
Regarding returning rental income, you should, of course, return the income and expenditure on the rental property for each tax year that the property is rented out.
Since you only started renting the property out after 5 April 2010, the first tax return you will need to complete will be the 2010/11 return. This will not be actually due to be submitted to HMRC until 31 January 2012. As soon as possible however, you do need to notify HMRC that you are renting out a property now so that they can issue you with a return sometime after 6 April 2011.
A rental income and expenditure account consists of the gross rents received from the tenants in the tax year less allowable costs. Allowable costs consist of-
Mortgage Interest (note INTEREST, not the full mortgage repayment, although if the mortgage is "Interest Only" then the repayments will equate to the same thing).
Property Insurance
Property Maintenance
Management Fees
Accounting Fees
Repairs and Maintenance
Rates, Water Charges, Light & Heat costs met by the landlord
If the property is a " Fully Furnished Let", the cost of replacement furniture is also allowed. Alternatively, a "10% Wear and Tear" claim can be made. The 10% is applied to the Gross Rents figure less rates and water charges.
Capital costs - such as major refurbishments, extensions or conversions cannot be treated as "Repairs" and therefore cannot be offset against rental income. This type of cost is looked on as "Enhancement Expenditure" and will be allowed as a cost when computing the Capital Gains Tax situation if and when the property is sold.
Hope that helps.
You bought it in November 2007. You have therfore owned it for almost exactly 3 years.
If you sold it tomorrow, if there was any sort of Capital Gain on disposal (which may be unlikely), the gain would be completely exempt from Capital Gains Tax.
Now the (not so) bad news
Regarding returning rental income, you should, of course, return the income and expenditure on the rental property for each tax year that the property is rented out.
Since you only started renting the property out after 5 April 2010, the first tax return you will need to complete will be the 2010/11 return. This will not be actually due to be submitted to HMRC until 31 January 2012. As soon as possible however, you do need to notify HMRC that you are renting out a property now so that they can issue you with a return sometime after 6 April 2011.
A rental income and expenditure account consists of the gross rents received from the tenants in the tax year less allowable costs. Allowable costs consist of-
Mortgage Interest (note INTEREST, not the full mortgage repayment, although if the mortgage is "Interest Only" then the repayments will equate to the same thing).
Property Insurance
Property Maintenance
Management Fees
Accounting Fees
Repairs and Maintenance
Rates, Water Charges, Light & Heat costs met by the landlord
If the property is a " Fully Furnished Let", the cost of replacement furniture is also allowed. Alternatively, a "10% Wear and Tear" claim can be made. The 10% is applied to the Gross Rents figure less rates and water charges.
Capital costs - such as major refurbishments, extensions or conversions cannot be treated as "Repairs" and therefore cannot be offset against rental income. This type of cost is looked on as "Enhancement Expenditure" and will be allowed as a cost when computing the Capital Gains Tax situation if and when the property is sold.
Hope that helps.
Eric, that's fantastically helpful. Thank you hugely.
The CGT is the point that confuses me a little, more so than the tax on rental yield and the applicable offsets. Am I right in saying therefore that even though it was first purchased as a primary residence, and assuming I dont buy anoither property before disposal, I would still be liable for CGT on any increase in value against the cost at which it was acquired? On that basis, if I had bought the property in 1960 for £1000, moved out into an old peoples shelter 6 months ago but let the property for those 6 months, CGT would apply on the increase from 1960>2010 notwithstanding the fact it was rented from mid-2010 to the end of the year?
The CGT is the point that confuses me a little, more so than the tax on rental yield and the applicable offsets. Am I right in saying therefore that even though it was first purchased as a primary residence, and assuming I dont buy anoither property before disposal, I would still be liable for CGT on any increase in value against the cost at which it was acquired? On that basis, if I had bought the property in 1960 for £1000, moved out into an old peoples shelter 6 months ago but let the property for those 6 months, CGT would apply on the increase from 1960>2010 notwithstanding the fact it was rented from mid-2010 to the end of the year?
Shnozz said:
Eric, that's fantastically helpful. Thank you hugely.
The CGT is the point that confuses me a little, more so than the tax on rental yield and the applicable offsets. Am I right in saying therefore that even though it was first purchased as a primary residence, and assuming I dont buy anoither property before disposal, I would still be liable for CGT on any increase in value against the cost at which it was acquired? On that basis, if I had bought the property in 1960 for £1000, moved out into an old peoples shelter 6 months ago but let the property for those 6 months, CGT would apply on the increase from 1960>2010 notwithstanding the fact it was rented from mid-2010 to the end of the year?
In theory, anyone who bought a property in 1960 and didn't use it as their main residence for a long time (or ever) and was selling it this year would have a potential big CGT headache on their hands. However, you are not in that situation so I wouldn't worry too much about that particular scenario.The CGT is the point that confuses me a little, more so than the tax on rental yield and the applicable offsets. Am I right in saying therefore that even though it was first purchased as a primary residence, and assuming I dont buy anoither property before disposal, I would still be liable for CGT on any increase in value against the cost at which it was acquired? On that basis, if I had bought the property in 1960 for £1000, moved out into an old peoples shelter 6 months ago but let the property for those 6 months, CGT would apply on the increase from 1960>2010 notwithstanding the fact it was rented from mid-2010 to the end of the year?
First of all, your main residence is completely CGT fee. If you own a property that was ONCE your main residence but is no longer, then the period that you lived in that property plus an addition three years is taken as being exempt from CGT.
So, if you bought a house in (say) May 2001 costing £100,000, lived in it until November 2006 and sold it in November 2010 for £200,000, it would work out like this.
Sale Proceeds - £200,000
Cost - £100,000
Gain £100,00
Not all of this gain will be taxed.
First of all, you owned the property for 115 months in total (1 May 2001 to 30 November 2010)
You lived in the propery for 67 months (1 May 2001 to 30 November 2006)
Therefore 67/115 of the gain is exempted for CGT purposes. In fact, you get a "free" extra three years (36 months) on top of that so the total number of months exempted from the gain comes to 103 (67 plus 36) months. This leaves only 12 months taxable.
Therefore, the gain that is taxable is
£100,000 x 12/115 = £10,435
You are allowed offset the annual CGT personal allowance against the taxable gain. Since the allowance is curently £10,100, this leavs only £335 taxable. The tax payable is calculated at either 18% or 28%, depending on whether you pay Income Tax at the higher rate or not.
If the property is jointly owned, then the gain is split 50:50 between the two owners who can each apply their personal £10,100 allowance which, in this case, would mean that there would be no CGT liability arising.
Obviously, the longer the time gap between the time you moved out of the house and the time you sell it will bring more of the apportioned gain into the taxable zone.
Time to do some sums.
Edited by Eric Mc on Friday 29th October 17:23
Shnozz said:
Not jointly owned so can only use my allowance :-(
Eric, you've been a total star with your candid advice. Much, much appreciated - huge thanks.
Was the query about a property purchased in 1960 of any significance to you or a family member (like a parent)? I dismissed it in my original reply because it wasn't releveant to the issue surrounding your own property.Eric, you've been a total star with your candid advice. Much, much appreciated - huge thanks.
The jiffle king said:
Eric, Just wanted to say Thankyou for your response on this thread, it will be the case for me in a couple of years and your explanation makes it very clear what to do. I shall bookmark the thread and read accrodingly in a few years (I know the laws might change)
Many Thanks
T-J-K
Yes, CGT changes every 6 months it seems at the moment. It's a very difficult tax to understand because, since it came in back in 1965, it has changed fundamentally many times in the interveining years. As well as that, sometimes you need to be aware of old rules which may still be relevant. Many Thanks
T-J-K
Assets that are subject to CGT are often owned by an individual (or a group of individuials) for many years and you often need to be aware of some rules that may no longer be current but which may be relevant for part of the period of ownership.
Thread resurected..........
All of the advice above is really helpful, but I have a further question based on 2 conversations I´ve had with people.
I have been living abroad for 2 years and could easily be here for 3 more years. A conversation I had with the tax office yesterday said that if I stay here for over 5 years and my UK property is my only property then I would not have to "declare" anything if I sold the property after this time. Up to 5 years, I would have to pay capital gains tax in accordance with the posts above
This does not sound right to me, and I will be checking with the tax specialist assigned to me by the company, but I wondered if anyone had heard this view or whether it was wrong?
Can anyone help?
All of the advice above is really helpful, but I have a further question based on 2 conversations I´ve had with people.
I have been living abroad for 2 years and could easily be here for 3 more years. A conversation I had with the tax office yesterday said that if I stay here for over 5 years and my UK property is my only property then I would not have to "declare" anything if I sold the property after this time. Up to 5 years, I would have to pay capital gains tax in accordance with the posts above
This does not sound right to me, and I will be checking with the tax specialist assigned to me by the company, but I wondered if anyone had heard this view or whether it was wrong?
Can anyone help?
If you bought a property with the intention of it being your main residence, but you were unable to live there due to force of circumstamnce, such as having to move abroad because of job committments, then that property will still obtain the automatic three year "bonus" of "main residence exemption".
However, anything beyond the three years will start to fall into the CGT computation.
I wsn't aware of any specifixc CGT exemptions due to living abroad as such.
However, anything beyond the three years will start to fall into the CGT computation.
I wsn't aware of any specifixc CGT exemptions due to living abroad as such.
I´ve done a little more digging on this and it appears that there might be an exemption if my employment was outside the UK
http://www.hmrc.gov.uk/cgt/property/sell-own-home.... The full pages
The relevant parts are:
"Working away from home
You'll still get the full relief if you couldn’t live in your home because you were employed and either:
you carried on all of your work or duties outside the UK
the distance from work or the requirements of your job stopped you living at home - and you were absent for less than four years
The following must also apply:
the house was your only or main home both before and after you worked away
you were not entitled to Private Residence Relief on any other property during that time (see 'Owning more than one home' below if you're unsure)
If you can't return to live in the house because your existing job still requires you to work away, you'll get the full amount of relief.
See the section 'Living away from home' below if you were absent for other reasons.
Example
You bought a house in 1994 and used it as your main home.
Your employer sent you to work abroad in 1995.
You returned to your main home in 2000 and lived in it until you sold it in 2011.
You're entitled to full Private Residence Relief as your absence was because you had to work abroad"
It looks like anyone working away from home gets relief however.......
Letting all or part of your home
If you've let out all or part of your home you may not get full Private Residence Relief when you sell or dispose of it, but you may get another relief known as 'Letting Relief'.
The maximum amount of Letting Relief due is the lower of:
£40,000
the amount of Private Residence Relief due
the amount of gain you've made on the let part of the property
Example
You used 60 per cent of your house as your home and let out the other 40 per cent.
You sell the property, making a gain of £60,000.
You're entitled to Private Residence Relief of £36,000 on the part used as your home (60 per cent of the £60,000 gain).
The remaining gain on the part of your home that's been let is £24,000.
The maximum Letting Relief due is £24,000 as this is the lower of:
£40,000
£36,000 (the Private Residence Relief due)
£24,000 (the gain on the part of the property that's been let)
There's no Capital Gains Tax to pay - the gain of £60,000 is covered by the £36,000 Private Residence Relief and the £24,000 Letting Relief.
Arrgghhhhhh it looks like I need to talk to the tax people... but helpsheet 283 gives me some hope!!
http://www.hmrc.gov.uk/cgt/property/sell-own-home.... The full pages
The relevant parts are:
"Working away from home
You'll still get the full relief if you couldn’t live in your home because you were employed and either:
you carried on all of your work or duties outside the UK
the distance from work or the requirements of your job stopped you living at home - and you were absent for less than four years
The following must also apply:
the house was your only or main home both before and after you worked away
you were not entitled to Private Residence Relief on any other property during that time (see 'Owning more than one home' below if you're unsure)
If you can't return to live in the house because your existing job still requires you to work away, you'll get the full amount of relief.
See the section 'Living away from home' below if you were absent for other reasons.
Example
You bought a house in 1994 and used it as your main home.
Your employer sent you to work abroad in 1995.
You returned to your main home in 2000 and lived in it until you sold it in 2011.
You're entitled to full Private Residence Relief as your absence was because you had to work abroad"
It looks like anyone working away from home gets relief however.......
Letting all or part of your home
If you've let out all or part of your home you may not get full Private Residence Relief when you sell or dispose of it, but you may get another relief known as 'Letting Relief'.
The maximum amount of Letting Relief due is the lower of:
£40,000
the amount of Private Residence Relief due
the amount of gain you've made on the let part of the property
Example
You used 60 per cent of your house as your home and let out the other 40 per cent.
You sell the property, making a gain of £60,000.
You're entitled to Private Residence Relief of £36,000 on the part used as your home (60 per cent of the £60,000 gain).
The remaining gain on the part of your home that's been let is £24,000.
The maximum Letting Relief due is £24,000 as this is the lower of:
£40,000
£36,000 (the Private Residence Relief due)
£24,000 (the gain on the part of the property that's been let)
There's no Capital Gains Tax to pay - the gain of £60,000 is covered by the £36,000 Private Residence Relief and the £24,000 Letting Relief.
Arrgghhhhhh it looks like I need to talk to the tax people... but helpsheet 283 gives me some hope!!
Edited by The jiffle king on Tuesday 30th August 12:36
Edited by The jiffle king on Tuesday 30th August 12:49
I think the phrase "absent for less than four years" might be a key bit of wording.
That seems to be alluding to the three year general exemption for the Main Residence from CGT.
Whatever yoiu find out, please post the result on here as it would be interesting to see if working overseas creates a special case.
That seems to be alluding to the three year general exemption for the Main Residence from CGT.
Whatever yoiu find out, please post the result on here as it would be interesting to see if working overseas creates a special case.
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