Tax relief on 2 Mortgages

[josswallace]

I bought my flat as a sitting tennant in November 2004 for £220,000 which I raised through a private mortgage at 6% per annum. I then raised £80,000 through various means to renevate and update the property and in January 2006 I raised a £300,000 Buy to Let mortgage from Mortgage Express. I finally let the property in April 2006.

I am now about to fill in my 2004-2005 tax return and have some queries.

1. I presumably have to inform the Inland Revenue that I purchased the flat in November 2004. Do I show the mortgage interest paid even though I have no rental income to off set.

2. For the following Tax year can I show interest on the £220,000 mortgage from Mar 2005 to Dec 2005 and then against the £300,000 mortgage from Jan 2006 to Mar 2006.

3. Do I have to wait for the tax year 2006-2007 before I can off set any rental income not earned until April 2006 on can I off set some of it against prvious years interest and if so how much, i.e. I could delay my tax return for 2004-2005 until say August or even later.

I am obviously a novice and any help would be appreciated.

[Tax Accountant]

I bought my flat as a sitting tennant in November 2004 for £220,000 which I raised through a private mortgage at 6% per annum. I then raised £80,000 through various means to renevate and update the property and in January 2006 I raised a £300,000 Buy to Let mortgage from Mortgage Express. I finally let the property in April 2006.

I am now about to fill in my 2004-2005 tax return and have some queries.

ANSWER: Do you mean tax return for the tax year 2005-06?

1. I presumably have to inform the Inland Revenue that I purchased the flat in November 2004. Do I show the mortgage interest paid even though I have no rental income to off set.

ANSWER: There is no obligation to notify the purchase of flat in November 2004. As the flat was purchased for your own occupation, there is no need or point to declare the mortgage interest. Therefore, there is no need to complete the tax return for tax year 2004-05 on account of your lettings business.

2. For the following Tax year 2005-06, can I show interest on the £220,000 mortgage from Mar 2005 to Dec 2005 and then against the £300,000 mortgage from Jan 2006 to Mar 2006.

ANSWER: The interest upto December 2005 is related to your private residence and there is no need to declare this.

You will be able to claim the loan interest only from the date when the property effectively entered your lettings business. This could be the date from which you vacated the property or the date when the property was actually available for letting. Presumably this would be from approximately January 2006. To do this, you will need to complete the tax return for the tax year 2005-06.

3. Do I have to wait for the tax year 2006-2007 before I can off set any rental income not earned until April 2006 on can I off set some of it against prvious years interest and if so how much, i.e. I could delay my tax return for 2004-2005 until say August or even later.

ANSWER: I do not understand your question fully.

The tax return for 2004-05 was due by 31 January 2006 but you do not need to complete this on account of your lettings income as you did not commence this until at least January 2006.

The tax return for 2005-06 will be due by 31 January 2007.

All tax returns are to be completed for the whole tax years even if certain new sources commenced part way through the tax year. Therefore, even if your rental business commenced from January 2006, you will still need to declare all your income from all sources for the whole tax year commencing 6 April 2005.

You should complete the tax return for the tax year 2005-06 and include therein the details of your allowable expenses. As you had no rental income until the following tax year, you will have a tax loss to carry forward to set against net rental income of the following tax year 2006-07.

I am obviously a novice and any help would be appreciated.

I have completed the replies in RED after each of your questions above.

Ramnik

[josswallace]

Karongo I made an error and gave some misleading and irrelevant information in my original post, for which I apologise because I really appreciate your response.

I already own a house as my prime residence and I actually bought the flat in November 2004 purely as a buy to let business for 2 to 3 years. I have submitted my 2004-2005 tax return and not informed the internal revenue of this purchase. As it was bought for rental purposes should I inform the revenue of this omission before I submit my 2005-2006 tax return.

I realise that the money I spent on improvement/refurbishment is not allowable against rental income but what will the tax man make of a £220,000
private mortgage for purchase followed a year later by a £300,000 buy to let mortgage.

Although I earned no rental income April 2006 i.e the 2006-2007 tax year can I catrry forward mortgage interest expenses from both the mortgages.

Once again thank you for your considderd response.

[Tax Accountant]

You say that you already own another house which is your main residence.

You also say that you bought the buy to let house in November 2004 as a ''sitting tenant''. Did you actually live in this house at any time since you bought it?

Ramnik

[josswallace]

Karongo, again many thanks for sticking with me.

The sitting tenennt bit is not relevant. I purchased the property on the 1st of November 2004 and by that time there was no one living there. I commenced renovation work and the flat remained empty until April 2006 when it was let on a joint AST.

Ian

[Tax Accountant]

Karongo, again many thanks for sticking with me.

The sitting tenant bit is not relevant. I purchased the property on the 1st of November 2004 and by that time there was no one living there. I commenced renovation work and the flat remained empty until April 2006 when it was let on a joint AST.

Ian

If you had used the property as your residence at anytime since purchase in November 2004, you would have been eligible to nominate it as your main residence for CGT purposes. This would have given you significant advantages in the calculation of your CGT payable on a sale of this property in the future. Such an election needs to be made within 2 years time limit from the date it was used as your residence. Therefore, you would still have been within the 2 year time limit until November 2006.

However, as you say that you did not use the property as your residence since purchase in November 2004, you are not eligible to make the nomination.

On the basis that the property was not used as your residence since the date of purchase, you are querying where you stand regarding the loan interest paid.

You raised a private mortgage at 6% per annum in November 2004 for £220,000. (Have you considered whether the lender has declared the interest as his/her income? It may also be that you had an obligation to deduct tax at source at basic rate from the interest before paying the net amount over to the lender. You would then have had to pass any such tax deducted to the tax authorities.)

You then raised £80,000 through various means to renovate and update the property. (It is not clear whether you borrowed this money or used your own funds.)

In January 2006 you raised a £300,000 Buy to Let mortgage from Mortgage Express. (Presumably this was used to pay off the above mentioned loans of £220,000 and £80,000. If so, the interest on this loan would be eligible expense of your lettings business.)

The property was finally let in April 2006. Therefore, you do not have any rental income for the tax year 2004-05 and 2005-06. However, you do have at least the loan interest for the tax tax years 2004-05 and 2005-06.

I assume that it took you from November 2004 to January 2006 to renovate and update the property in preparation for letting. This suggests to me that the property was not available for letting until at least January 2006. On this basis, there is a possible argument by the tax office that none of the loan interest until this date is eligible expense of your lettings business.

However, as the property was purchased with the purpose of letting, you have a case for claiming the loan interest from November 2004 to March 2005 as a lettings loss for the tax year 2004-05 and this is carried forward to the tax year 2005-06.

The loan interest from April 2005 to March 2006 needs to be claimed as a tax loss in the year 2005-06. This together with the loss from the previous year needs to be carried forward to the following year 2006-07.

Strictly the loan interest could be claimed as an expense and a loss for the tax years 2004-05 and 2005-06, but you should make this clear to the tax office so that if they have any objections, this could be debated and cleared up one way or the other.

You are best advised to take professional advice on all the issues before taking any further action.

Ramnik