Tax on my rented flat's loss/ profit

[b81563]

Hi, I wonder if anyone can help with my tax-related questions. I have got different advice / inpressions from what I have looked into so far.

As background....
I used to have a mortgage on my current home of £75k. When time came to update my mortgage I requested one for £200k to enable me to buy a flat. There was sufficient equity in my home so, rather than get a buy-to-let mortgage, the mortgage adviser arranged a flexible 200k mortgage on my current home that gave me 75k up front for my house remortage needs and an option for an additional £125k to buy the flat at a later date. I actually bought the flat and began renting it out 2 years later (1 year ago). At this time the flat was valued at £145k. My mortgage is now the full 200k.
I would appreciate your view on my tax position....
Firstly, is it true that, whilst the mortgage is 'registered' against my home, because I have used some of it to purchase a flat, then I can claim for tax relief on the mortgage interest related to the flat's market value? And that, given that the flat was valued at £145k at the time of renting, that I can claim tax relating to interest on a £145k loan rather than the £125k that I originally paid for the flat?
Am I obliged to provide proof of value at the time I started renting it out?

Secondly, the flat has been bought by my wife and I together, and the motgage is also in both our names. I work and am just in the 40% tax bracket - my wife does not work. I understand we can decide how to split the profit / loss on the flat. Currently, given the rental market / financial situation I am accepting below market rent (£500 now vs previous £600 / month). Whilst my mortgage is low (c.140/month for the flat-related element) I do expect this to rise again to, say, 500 or 600 per month as interest rates rise in the future. I have about £1k / yr service charge etc. to pay on the flat. This suggests to me that I may not make profit on the rental in a given year, e.g. :
Rent 12x500 = 6000
Mortgage, assume 6000 nominally
Ground rent / service charge = 1000
Wear and Tear @10% = 600
The above would give me a loss, and with higher rent, it would be touch-and-go as to loss or profit. I am basically assuming we would look for future capital growth.

Therefore, given I am a 40% tax payer, I feel that any profit / loss should be 100% against me - if there's a loss I get 40% relief on it. If my thinking is correct on the last point.... would the fact that I'd associated 100% of profit / loss to myself then carry over to any capital gain in the future should we sell the flat. (i.e. would 100% capital gains be related to me rather than say a 50/50 split with my wife).

I am due to see an accountant tomorrow to do my tax retrun but I feel I have now done most of it - but for the 2 questions above. So not sure if it is a waste of money as I wonder what else an accountant would do (do they know answers to these sorts of questions?).

I hope the above is clear and that you are able to advise me. Thanks. Nick

[TaxationPete]

The established value of the property when 'First Let' limits the the amount of mortgage that you can claim the interest against the gross rental income. However as the mortgage was not raised against that rental property then HMRC are liable to argue that the only mortgage against the property is the original £125K which is true. Any loan in excess of the purchase price must be wholly and exclusively used in your rental business, and it is not, it is your private mortgage.
Rental income : Assuming you jointly own the property then your rental income/profit will be 50/50 unless you own the property in a different proportion or you establish a Declaration of Trust to define the Beneficial Ownership and you submit Form 17 to HMRC within 60 days.
If in a FY you make a loss then this is not offset against your 'normal' income but carried forward to use against rental profits in the future.
You can not just choose who declares the propfit/loss and capital gains liable. They are a matter of fact and at present you are 50/50 ( joint assumed ) and both of you get full CG Allowance should you sell the property.
Regards Peter

[Telometer]

1. Suggest you go and talk to your accountant. I think there may well be a good argument that the INTEREST on the full 145k is deductible. But you will need to talk dates, sums etc. As money is fungible, and you produced 145k of cash to acquire that property, I feel you should be in a reasonable position.

2. You are making a PROFIT, not a LOSS. Your mortgage payments are £1,680.

3. Very sensible to transfer the rights to the income to your wife. But for the time up until you do, you will be assessed 50:50 on it. Your accountant will help with this.

4.
I am accepting below market rent Bad news, market rent has dropped; you are accepting market rent.

5.
we would look for future capital growth You believe in fairies too?

[TaxationPete]

There is no indication that the OP "produced 145k of cash to acquire that property" only 125K the valuation some time later was 145K. Regards Peter

[Telometer]

You are absolutely right. My mistake.

[b81563]

Thanks for your help.
Accountant agreed with you on property value.
However, he suggested the allocation of profit / loss could be changed year by year. He suggested it is similar to, if I have a load of savings (I wish) then, rather than me keep them, I can put them to my wife to reduce tax on them.
Best regards and thanks again.

[TaxationPete]

"he suggested the allocation of profit / loss could be changed year by year."
Only by changing, either the legal ownership proportion or changing the Beneficial Ownership and re-submitting Form 17. The latter will raise eyebrows at HMRC as you are married. Strangely enough, if you were not married you can move the profit around freely but not if you are married. I suspect that is what your accountant has forgotten. Regards Peter