Clarifying the basics

[Mike_H]

Hi,

I'm shortly going to be renting out my house when I move in with my partner, but I'd like to try and get clear the tax implications.

My house is worth £200k and I have a £100k repayment mortgage, which costs about £700 per month. An agency suggest I should be looking at £900 per month rental, and their monthly fees are 10% of this (ie £90)

As I understand it, the interest part of the mortgage (let's assume £500 per month) and the agency fees can be deducted meaning I pay tax on (900-500-90) = £310 per month

So my first question is "is this correct"?

Secondly, I assume I can also offset any repairs I have to make to the house?

And thirdly, as I am a 40 % tax payer, if the above is correct I'm going to pay (310 * 40%) = £124 per month.

Would I be better off increasing the mortgage (and therefore getting a lump sum back to invest in ISA's etc) so that the higher interest payments balance the income and therefore I make no profit from renting the house.

Thanks for any help

Mike

[Grange]

So my first question is "is this correct"?
Yes. Don't forget other expenses e.g. insurance; travel to the property. Are you letting it furnished?


Secondly, I assume I can also offset any repairs I have to make to the house?

Yes... provided that the repairs are repairs. If that sounds a bit Irish, the following two examples are not repairs:

1. If the roof leaks when the house is put into letting, then its repair or replacement not a repair. It is a cost of acquisition of rental property.

2. Taking out a cheap bathroom suite and replacing it with an expensive one. Even if the old one is worn out. This is an improvement, not a repair.


And thirdly, as I am a 40 % tax payer, if the above is correct I'm going to pay (310 * 40%) = £124 per month. Would I be better off increasing the mortgage (and therefore getting a lump

You may well be, but that is an investment decision. You can raise the level of debt up to the value of the property when first you start letting it.

[Mike_H]

Thanks for the reply.

You mention 'travel to the property' - I assume this is travel expenses to visit to make repairs etc.

The house will be rented as unfurnished but with white goods in place. I assume anything that breaks and needs replacement (such as a fridge) would also be deductable?

Is there a document or site somewhere which would have a list of what can be claimed back, mileage rates (for the above), what is deemed as acceptible (and what is taking the p!$$ :) ) etc

I understand what you mean about repairs.



You may well be, but that is an investment decision. You can raise the level of debt up to the value of the property when first you start letting it.

Yes - Just seems a shame to pay extra money to the taxman if there is a way around it. I'm sure someone must have looked at the pro's and con's - I'll have to do a bit more research

Thanks

Mike

[Grange]

The pros and cons are an investment decision, not a tax decision.

From a tax perspective: tax money out of an investment that pays tax (house) and put it into an investment that doesn't pay tax (ISA). Bargain. (Obviously you're achieving this by leveraging the house more highly.)

HMRC's approved mileage rate is acceptable. (Much better than trying to guess at a fraction of your running costs.) About 40p per mile, isn't it.

[Steve Sims]

Hi guys

Re clarifying the basics...

1. If you have a letting agent, your place of business will be their office and not your home, so it is unlikely you will be able to claim little if any travel expenses.

2. Re the list of expenses ....I am writing a property tax book for the Dummies guides due for publication in June. There is a chapter in the book listing the business expenses that can be claimed by property people and how to claim them. You can pre-order from Amazon.

3. If the roof is leaking and it is replaced with a roof of the same standard and cost or repaired in part, this is a revenue expense, not a capital expense.

4. Costs of acquisition of rental properties are limited to a very few expenses listed in Section 38 of the Taxation of Chargeable Gains Act 1992. Improvements to the properties arre certainly a capital expense, not incidental costs of acquisition or disposal, but enhancements.

5. When you transfer the property to your property business, you are creating a capital account equal to your investment (equity) in the property, which you can draw on tax fee and spend on what you like - and at the same time the property business will pay the interest on the finance it will have to raise to fund your investment.

6. You can reduce your current and future tax by changing the ownership of the property from a sole tenancy to a tenancy-in-common with your wife. You can transfer a share of the property and therefore a share of the rental profits and capital gains to her. Presumably she is a lower rate taxpayer. If she is not, it's not worth doing except for the future capital gains tax annual exempt amount it will provide. You should note that the government's income shifting proposals that were shelved until next year in the Budget exempt property investors from income shifting because running a letting business is not a trade. Property developers are not so lucky.

I hope this clarifies some of your questions.

[Grange]

1. If you have a letting agent, your place of business will be their office and not your home, so it is unlikely you will be able to claim little if any travel expenses.

How very interesting. Perhaps you would be so kind as to post a technical analysis of this point so we can all understand your reasoning.

[CoffeeCup]

Hi guys

Re clarifying the basics...

1. If you have a letting agent, your place of business will be their office and not your home, so it is unlikely you will be able to claim little if any travel expenses.


Doesn't that assume that the letting agent is close to the property?

Say my letting agent is in Scotland, my property in Southhampton and live in Portsmouth.

I travel to the property say 20 miles to the property to carry out a repair,

Are you saying that I can claim the mileage for a trip between Scotland "office" -> Southampton "property" plus the return leg?

[Steve Sims]

http://www.hmrc.gov.uk/manuals/pimmanual/PIM2210.htm

is the link to the tax inspector's internal guidance on travel expense claims for property investors. This should clarify the point for you Grange.

The point here is that if you are going to claim an expense, as a taxpayer you should know the points to prove to the tax man, so if he queries your claim, you have the knowledge to back up what you are saying.

If you don't, how do you know what records to keep and why?

You need to know the law and how to apply it to your circumstances to save tax, and that is what I shall be hoping to assist forum members on in future posts. I can provide a full technical analysis referring to legislation and case law of any point I raise, as I do not deal in opinions but facts.

I know there are many people here who want to help their fellow investors, and in the main, their experience and comments are a valuable resource. I have been asked to provide professional advice on this forum as a topic expert. I don't know everything, but I do know that every point I make will have a basis in law or I won't make it and none of you should expect any less.

So please point out any errors and I will investigate and correct them, if required. I am not here to upset forum members but to help them, so anyone can feel free to contact me via my web site - see link below - and can read my experience and background in my profile, which the site owner will be updating next week.

[CoffeeCup]

Steve, Thanks for your input and good luck with the book.

Relevant links which expand on information you provide are always welcome.

I think even with the facts there is an element of interpretation which fuels further debate and helps better understanding.

Looking at the link provided,


Use of a letting agent
Some landlords engage a letting agent to collect rents, organise services etc. Where a letting agent carries out all (or virtually all) the duties relating to the letting activity, it is likely that the rental business is being conducted through the agent. In such circumstances, the business 'base' is likely to be the agent's office, and travelling expenses from the taxpayer's home will not normally be allowable.


Could it not be successfully argued that if you are attending your properties to carry out repairs/inspections that the business 'base' is your home and *not* the letting agents office, as they will *not* be carrying out "all (or virtually all) the duties relating to the letting activity"?

[Grange]

Coffee Cup. You should also be aware that the contents of the HMRC's manuals is their interpretation of the law, NOT the law. Note their use of 'likely' and 'normally'.

Travel costs related to set-up costs, selecting an agent, would presumably be allowable. The place of business at that point can only ever be your home - there is no agent.

Now, what if you have two letting properties with two letting agents? 264(2) ITTOIA defines a property business as being a single business consisting of every business which the person carries on for generating income from land. You can offset profits from one property by losses from another; there is not the segregation experienced between different trades.

Under these circumstances you have two agents under your control. It is perfectly possible for a business to have multiple places of business. There is no suggestion that travel between head office and other offices is disallowable.

So Steve. Do you have experience of structuring a lettings business in such a way as to permit the deduction of the owner's travel expenses despite his use of a LA? I am imagining something along the lines of the management and control tests for non-UK resident companies.


Coffee Cup. No you could not claim that mileage; there is a triangular travel test which would limit you to your actual distance. Anyway, why would you employ a LA in Scotland? They're there to make your life EASIER, not harder!

[CoffeeCup]

Anyway, why would you employ a LA in Scotland? They're there to make your life EASIER, not harder!

I've noticed a number of management/letting agents that aim to provide a UK wide service. In fact a company called Prima Management appear as an advertising banner on this site.

I used a non local agent as an example to test the rules.

[Steve Sims]

1. It's correct that HMRC guidance has no force in law

2. I think when the law isn't clear, the best thing to do is to look at the spirit of the law the drafter intended and case law. The link above has two cases Newsom v Robertson and Horton v Young. These are not only used in property tax cases but all business cases.

3. The drafter is clearly trying to put the self-employed guy on an equal status with what an employee can claim

4. In that respect I think it's fair that you can claim for the travel you make that meets the tests...wholly and exclusively etc AND does not duplicate the agents work.To argue that, I'd have a clear non-ambiguous agreement with the agent re responsibilities for him and me and keep a detailed business travel log.

5. I think it goes pear-shaped when you try and be unreasonable and have your cake and eat it - like the barrister wanted.

6. I think the segregation thing is a bit of a red-herring - property accounts follow trading accounts preparation because its convenient. Workplaces have nothing to do with the way the accounts are kept.

7. I am currently building a case law archive for property tax that will be ready in a few weeks...i'll let you know when I find something useful. The ruling that comes to mind is that the City of London can be a workplace...not individual places within the city...so if you have a number of houses in the same town, that may make the town the workplace.