Reducing tax on rental income

[Liz100]

Can you see any problems that HRMC or a mortgage lender would have with the following plan:

1. we remortgage a property that we currently live in (which is almost mortgage free) with a buy to let mortgage. We move out of this property and rent it out. The rental income will equal the mortage interest payments thereby avoiding income tax.

2. we use the money raised from the remortgage to pay off the majority of the existing mortgage on our second property which we will move into as our main residence.

Is this OK or would HRMC regard moving a mortgage from one property to another as some sort of evasion?

Thanks
Liz

[TaxationPete]

No problem there, the use of the equity in your case is not restricted by HMRC as the mortgage is against the rental property. Also remember that the property was your PPR so is exempt form CGT for 36months ( read IR283 on the HMRC web site ) after which Letting relief will be avaiable for up to £40,000 per qualified owner. ( this will keep the property free from CGT for 5, 6, 7, 8 or even more years depending on what house prices do in the future. Regards Peter

[King_Maker]

That should be OK.

An example (Example 2) is given in the Inland Revenue's Business Income Manual at section 45700 :

http://www.hmrc.gov.uk/manuals/bimmanual/BIM45700.htm

You may struggle in the current economic climate to find a high LTV (if relevant) with a competitive interest rate.

It is also a high risk strategy which depends on rising house prices to succeed.

[Liz100]

TaxationPete

Thanks very much for the reply. We've checked IR283 but have another question now!

How is CGT calculated when we have lived in a house prior to renting it out? ie is the capital gain based on sale price minus purchase price (we bought it over 10 years ago) or is the capital gain based on sale price minus its value at the time was first let?

If its the former then the capital sum would be large but if its the latter then the capital sum would be very small (if not negative)

Hope this makes sense
Liz

[TaxationPete]

Basiclly it is the sale price minus the original purchase price factored by the total number of months live in plus 35 divided by the total number of months owned. Regards Peter

[Telometer]

>>if its the latter then the capital sum would be very small (if not negative)

If you believe house prices will drop, then - depending on your circumstances - it might be possible to crystallise the tax-free gain - and indeed possibly obtain the benefit of any capital losses in the future. Gifting the property to a child would be a starting point; using trusts, companies etc.

[TaxationPete]

Typo. 36 not 35. Didn't spot that last night