Property investment
Discussion
hi there,
I have recently bought a new house (with a garage at last!!). Rather than sell my current flat in Edinburgh I have decided to rent it out. The rental income will more than cover the mortgage and the extra cash will go towards paying the (large) mortgage on the new house.
I assume that any increase in value of the property that is not my main residence (i.e. the flat) will be charged at 40% if I sell the property. Is this correct? Is there any way of minimising / avoiding capital gains tax? Also what happens if at some point in the future I choose to move back into the flat and sell the house? Would I still have to pay tax on the increase in the value of the flat?
Am I correct is stating that I will only be taxed on the difference between the rental income and what I pay as a mortgage on the flat? Is there anything else that I can deduct (i.e. new fixtures and fittings such as new beds, curtains, bathroom suites, etc) to minimise the aount of tax that I pay?
I'm hoping that property prices will rise at approx. 4.0-4.5% per annum. Anything above this will be a bonus!
Cheers.
Martin.
I have recently bought a new house (with a garage at last!!). Rather than sell my current flat in Edinburgh I have decided to rent it out. The rental income will more than cover the mortgage and the extra cash will go towards paying the (large) mortgage on the new house.
I assume that any increase in value of the property that is not my main residence (i.e. the flat) will be charged at 40% if I sell the property. Is this correct? Is there any way of minimising / avoiding capital gains tax? Also what happens if at some point in the future I choose to move back into the flat and sell the house? Would I still have to pay tax on the increase in the value of the flat?
Am I correct is stating that I will only be taxed on the difference between the rental income and what I pay as a mortgage on the flat? Is there anything else that I can deduct (i.e. new fixtures and fittings such as new beds, curtains, bathroom suites, etc) to minimise the aount of tax that I pay?
I'm hoping that property prices will rise at approx. 4.0-4.5% per annum. Anything above this will be a bonus!
Cheers.
Martin.
Quick overview of English law, not sure if the position is the same in Edinburgh but I wouldn't have thought it was too far off:
HMRC treat the change from owner occupier to landlord as a transfer of the property from yourself to yourself but in a different capacity. In effect you are "buying" the property off yourself at the value it has when you start letting it out so the property becomes a business in its own right.
Interest on the mortgage can be deducted even if its in your personal name
You can increase the mortgage up to the value of the property at the time you start letting it out. Any capital you take out up to that point is tax free as in effect all you are doing is taking out the amount you "invested" ie the equity at the date of change. Interest on the loan is still deductible for tax
Any capital extracted over that value is subject to tax as a capital gain (so you get the benefit of CGT annual allowance)
If the property was your main residence you can still claim CGT exemption if you sell within three years. Not sure if this is an absolute rule or a HMRC exemption. If its the latter it might change. If you start letting it out you have effectively "sold" it (see above) at that date and hence taken advantage of the main residence exemption already
CGT would also be subject to tapering relief starting at the value at the time you start letting it out but I will defer to the accountants to explain it.
Hope it goes well.
HMRC treat the change from owner occupier to landlord as a transfer of the property from yourself to yourself but in a different capacity. In effect you are "buying" the property off yourself at the value it has when you start letting it out so the property becomes a business in its own right.
Interest on the mortgage can be deducted even if its in your personal name
You can increase the mortgage up to the value of the property at the time you start letting it out. Any capital you take out up to that point is tax free as in effect all you are doing is taking out the amount you "invested" ie the equity at the date of change. Interest on the loan is still deductible for tax
Any capital extracted over that value is subject to tax as a capital gain (so you get the benefit of CGT annual allowance)
If the property was your main residence you can still claim CGT exemption if you sell within three years. Not sure if this is an absolute rule or a HMRC exemption. If its the latter it might change. If you start letting it out you have effectively "sold" it (see above) at that date and hence taken advantage of the main residence exemption already
CGT would also be subject to tapering relief starting at the value at the time you start letting it out but I will defer to the accountants to explain it.
Hope it goes well.
You certainly won't have to pay any CGT on increases for the period it was your main residence. You also I believe get a further 3 year exemption for it having been your main residence (as opposed to having been bought primarily as an investment). So if you sell up within 3 years of moving out then your CGT bill should be nill. Worth getting it valued now and 3 years after having moved out, therefore keeping a record of it in writing so that should you keep it longer than that, you know what figure you are working from regarding increase and have written evidence of the valuations at the time to show to the revenuw. Regarding moving back in, yes this will possibly enable further CGT free periods but make sure you keep a track of or even "nominate" officially what you consider to be your main residence. Another good paper trail of this of course is where you are paying council tax. There are also a few other Tax relief vehicles such as Taper relief which may come into play depending on how long you actually keep it, this maxes out at 10years but can reduce the CGT to 10% I think. Best advice really is to speak to an accountant regarding specifics of this.
Regarding offsetting your mortagage against the rent, it is only the interest element of each payment that can be offset, I have an interest only mortage on mine as it makes that part nice and easy. Regarding what can and can't also be offset, the revenue differentiate I believe between improvements on a property and simple maintenance. "Maintenance" (decorating etc) can be offset against the rent but "improvements" cannot, improvement costs can however be offset against any CGT when you finally sell up. Mortgage being in your own name does not matter, but do make sure you have advised your mortage company that you are letting, most won't mind.
Sure Eric will be along shortly to debunk everything I have said and then confuse you further with a whole other set of rulings.
Edited to add: bugger beaten to it with a lot of this ^^^^^^^^^
Regarding offsetting your mortagage against the rent, it is only the interest element of each payment that can be offset, I have an interest only mortage on mine as it makes that part nice and easy. Regarding what can and can't also be offset, the revenue differentiate I believe between improvements on a property and simple maintenance. "Maintenance" (decorating etc) can be offset against the rent but "improvements" cannot, improvement costs can however be offset against any CGT when you finally sell up. Mortgage being in your own name does not matter, but do make sure you have advised your mortage company that you are letting, most won't mind.
Sure Eric will be along shortly to debunk everything I have said and then confuse you further with a whole other set of rulings.
Edited to add: bugger beaten to it with a lot of this ^^^^^^^^^
Edited by touching cloth on Thursday 30th November 17:28
No need to debunk anything TC. That covers most of the basic points.
Genuine capital improvements to the property cannot be offset against the annual rental income. They will be added to the original "cost" or "market value" as "Enhancement Expenditure" and will serve to reduce any gains on disposal.
The difficult part is sometimes trying to decide into which category particular expenditure might fall. Having the house redecorated would be normally treated as "repairs". Having extension work or a loft conversion would be looked on as "Enhancement Expenditure".
If the property is being let "fully furnished", a nominal 10% "Wear and Tear" allowance is also claimable. The allowance is calculated by multiplying the Rental Income less Rates and Water Charges paid by the landlord by 10%.
Don't forget that, on disposal, you will also be allowed to deduct the CGT Annual Exemption amount, currently £8,800, from the Gain.
Genuine capital improvements to the property cannot be offset against the annual rental income. They will be added to the original "cost" or "market value" as "Enhancement Expenditure" and will serve to reduce any gains on disposal.
The difficult part is sometimes trying to decide into which category particular expenditure might fall. Having the house redecorated would be normally treated as "repairs". Having extension work or a loft conversion would be looked on as "Enhancement Expenditure".
If the property is being let "fully furnished", a nominal 10% "Wear and Tear" allowance is also claimable. The allowance is calculated by multiplying the Rental Income less Rates and Water Charges paid by the landlord by 10%.
Don't forget that, on disposal, you will also be allowed to deduct the CGT Annual Exemption amount, currently £8,800, from the Gain.
Edited by Eric Mc on Thursday 30th November 17:16
Eric Mc said:
No need to debunk anything TC. That covers most of the basic points.
Genuine capital improvements to the property cannot be offset against the annual rental income. They will be added to the original "cost" or "market value" as "Enhancement Expenditure" and will serve to reduce any gains on disposal.
The difficult part is sometimes trying to decide into which category particular expenditure might fall. Having the house redecorated would be normally treated as "repairs". Having extension work or a loft conversion would be looked on as "Enhancement Expenditure".
If the property is being let "fully furnished", a nominal 10% "Wear and Tear" allowance is also claimable. The allowance is calculated by multiplying the Rental Income less Rates and Water Charges paid by the landlord by 10%.
Don't forget that, on disposal, you will also be allowed to deduct the CGT Annual Exemption amount, currently £8,800, from the Gain.
Genuine capital improvements to the property cannot be offset against the annual rental income. They will be added to the original "cost" or "market value" as "Enhancement Expenditure" and will serve to reduce any gains on disposal.
The difficult part is sometimes trying to decide into which category particular expenditure might fall. Having the house redecorated would be normally treated as "repairs". Having extension work or a loft conversion would be looked on as "Enhancement Expenditure".
If the property is being let "fully furnished", a nominal 10% "Wear and Tear" allowance is also claimable. The allowance is calculated by multiplying the Rental Income less Rates and Water Charges paid by the landlord by 10%.
Don't forget that, on disposal, you will also be allowed to deduct the CGT Annual Exemption amount, currently £8,800, from the Gain.
Edited by Eric Mc on Thursday 30th November 17:16
Eric do you need to keep receipts of all the expenses to prove to the tax man as I understand if the total expenses is less than £15k then a breakdown is not required?
Also if you incur losses in one year, for how many years ahead can it be carried forward?
Edited by Seany88 on Thursday 29th March 19:53
Edited by Seany88 on Thursday 29th March 19:54
Keep all receipts. Recently I had a tax inspector disallow a claim for an £800 redecoration cost because the client was unable to provide any evidence other than a hand written note in his rental expenditure book.
Rental losses can be carried forward indefinitely.
Obviously, if you dispose of the property before it ever generates any rental profits, those losses will go to wast.
Rental losses can be carried forward indefinitely.
Obviously, if you dispose of the property before it ever generates any rental profits, those losses will go to wast.
Edited by Eric Mc on Friday 30th March 00:20
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