Mortgage Interest - Tax Relief

[conifers]

We recently bought a second property with a view that I would use the property partially during the week (working away from home) - renting out one or two rooms to help pay for the extra mortgage.
Circumstaces changed and we now rent rooms in the the house to individual lodgers, with me not staying there.
We financed the purchase by increasing our PPR mortgage at the time - on an interest only basis - increasing by £150k of the £170k purchase price.
Are we in a position to offset our extra mortgage payment against the rental income being received for hte new property?

[Tax Accountant]

We recently bought a second property with a view that I would use the property partially during the week (working away from home) - renting out one or two rooms to help pay for the extra mortgage.

Circumstaces changed and we now rent rooms in the the house to individual lodgers, with me not staying there.

We financed the purchase by increasing our PPR mortgage at the time - on an interest only basis - increasing by £150k of the £170k purchase price.
Are we in a position to offset our extra mortgage payment against the rental income being received for hte new property?

Yes, interest on the extra borrowing specifically used towards the purchase of the second property is an allowable expense of your lettings business.

Did you use the property as your home at anytime since purchase before the circumstances changed? If yes, you should seriously consider nominationg the second property as your ''only or main residence'' for the purpose of Private Residence Relief (PPR relief) for Capital Gains Tax. Any such nomination could be made upto two years later. You could then vary the nomination back in favour of the first residence.

If a valid nomination is made and accepted by the tax office, you will save a considerable amount of CGT if and when you decide to sell the second property.

Ramnik

[conifers]

Thank you for your help.

We bought the property in nov 04. I used the property (midweek) for the first 6 months. since then we have rented out rooms and kept an eye from a distance.

The value has increased from £170k to circa £195k. It is in both names - I'm liable for 40%, my wife is a non tax payer.

Questions if I may:
1. Is it straightforward to demonstrate that our extra £150k taken out when remortgaging our main residence was specifically related to the new property. We remortgaged around 8 weeks prior to the purchase.
2. Does CGT work on an annualised basis - is the tax relief (£8.2k per person?) accumulated per year or not (i.e, would we pay CGT on £25k profit less 2 x £8.2k or 2 x 2 years @ £8.2k - sorry not very well explained!).
3. If I transfer as my / our main residence what are the implications when we sell it - then having to pay CGT on our main house - someone suggested that if we then sell our main property within less than 3 years we then have to pay CGT on the difference?

Thanks for your help.

[Matt Churchill]

2. Does CGT work on an annualised basis - is the tax relief (£8.2k per person?) accumulated per year or not (i.e, would we pay CGT on £25k profit less 2 x £8.2k or 2 x 2 years @ £8.2k - sorry not very well explained!).

In short no. It is a use it or lose it approach, if you do not use your full AEA each year you do not have the ability to carry forward.

Try looking here for some more info on it - http://www.hmrc.gov.uk/leaflets/cgtfs1.htm

[Tax Accountant]

Thank you for your help.

We bought the property in nov 04. I used the property (midweek) for the first 6 months. since then we have rented out rooms and kept an eye from a distance.

The value has increased from £170k to circa £195k. It is in both names - I'm liable for 40%, my wife is a non tax payer.

Questions if I may:
1. Is it straightforward to demonstrate that our extra £150k taken out when remortgaging our main residence was specifically related to the new property. We remortgaged around 8 weeks prior to the purchase.

Answer 1: If you borrowed the money in advance, presumably this was lying in a bank account from which it was eventually used to buy the property No 2. If so, I don't see why you should think that there may be a problem in demonstrating that the loan was used to purchase the 2nd property.

2. Does CGT work on an annualised basis - is the tax relief (£8.2k per person?) accumulated per year or not (i.e, would we pay CGT on £25k profit less 2 x £8.2k or 2 x 2 years @ £8.2k - sorry not very well explained!).

Answer 2: Relief is per person to be used against all the chargeable gains in any year of disposal. If there are no disposals in a particular tax year, you lose the relief for that year, ie it is not available to carry forward to a later year. Also if you have more than one chargeable disposals in any tax year, you still have only one amount available against the total gain of all disposals.

The amount for the current year is £8,800 per person. Therefore, if the asset is owned by two joint owners, each joint owner will have £8,800 annual exemption available to reduce his/her share of the chargeable gain.

3. If I transfer as my / our main residence what are the implications when we sell it - then having to pay CGT on our main house - someone suggested that if we then sell our main property within less than 3 years we then have to pay CGT on the difference?

Answer 3: You lose the relief against the main property only for the period for which the nomination is in force in favour of the second home. Therefore, if you bought the second home in Nov 2004, you could nominate this as your main home but any such nomination has to be made within 2 years of the date od purchase. If you then stopped using it as your home in May 2005, the main home again starts qualifying automatically for PPR relief. In that event the main home loses the PPR relief for 6 months. Alternatively, you could vary the election with effect from the 2nd week after the date of purchase. In that event you will lose the PPR relief for the main property for only 1 week. Both the nomination and any variation should be in writing to each taxpayer's tax office.

Any property which has been your only or main residence at any time in your ownership, will automatically have the final 3 years of ownership period automatically exempted from CGT.

Thanks for your help.

You are welcome.

Ramnik

See replies above in red.

Ramnik

[conifers]

Ramnik - once again thanks for your help. Excellent information.

Getting there I think. So by transfering my main residence to property b for one week within the first two years of ownership, and then reverting residence back to my long term residence a after one week means:

- full CGT exemption if I sell property b within three years of purchase?

- loss of just one week CGT for my long term property once reverted back? How is this calculated? Is it, for example, that if bought for £240k sold for £500k after 5 years, full CGT liability is £260k divided by 5 years (or 260 weeks), therefore 1 week payable = £1k of the £260k is taxable (before allowable £8.8k current annual exemption)?

[Tax Accountant]

Ramnik - once again thanks for your help. Excellent information.

Getting there I think. So by transfering my main residence to property b for one week within the first two years of ownership, and then reverting residence back to my long term residence a after one week means:

- full CGT exemption if I sell property b within three years of purchase?

Answer: If you sell after 3 years of ownership, any excess period may benefit from letting relief, taper relief and of course annual exemptions. Lettings relief is the lower of (1) £40,000 per joint owner, (2) equal to PPR relief, (3) gain arising as a result of letting, and (4) actual gain remaining after the PPR relief. Lletting relief could be potentially as much as the PPR relief itself.

Therefore, you will be able to retain the property a lot longer than the three years and still pay only little or no CGT.

- loss of just one week CGT for my long term property once reverted back? How is this calculated? Is it, for example, that if bought for £240k sold for £500k after 5 years, full CGT liability is £260k divided by 5 years (or 260 weeks), therefore 1 week payable = £1k of the £260k is taxable (before allowable £8.8k current annual exemption)?

Answer: All gains are time apportioned between exempt and chargeable periods. Therefore, your calculations are correct. There will also be taper relief. If you are married, you will each have the £8,800 exemption. So a lot of spare capacity here. Therefore, if you intend to retain the let property for a long period, you may wish to nominate it for the full 6 months to maximise the PPR relief and letting relief for that property and at the same time not attracting any CGT liability for your main home.


Again, see answers in red.

Ramnik