Off Plan - MV - Capital Account

[madpommie]

Hi

My question is with reference to this article reproduced below:
http://www.property-tax-portal.co.uk/taxarticle23.shtml

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"Benefiting from buying off-plan

Alex buys an investment property off plan in January 2002 for £125,000. When the property is completed in June 2003 it is worth £175,000. Upon completion Alex decides to let the property and therefore the property is transferred to the lettings business at a value of £175,000.

This means that in the future years, Alex can remortgage the property for an additional £50,000 and still offset the interest that is charged. It does not matter what the £50,000 equity release is used for, it can be offset against the rental income, as the market value of the property at the time of letting was £175,000.

So if Alex wants to use the £50,000 equity to buy a new sports car then the interest charged on the equity release can be offset against the rental income.

It is important to understand that Alex is not allowed to offset any interest charges for equity that is released above £175,000 unless it is used for the purpose of the lettings business.

So this means that if in future years the property is valued at £300,000, then although he may be able to release additional equity above £175,000 he will not be able to offset interest on this amount if it used for anything other than the lettings business."
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I am in a similar position. I exchanged contracts on a an off plan property for £245,000 in April 2005. The property comleted in August 2006 and was brought into my letting business. At this time the property was worth £350,000.

Whilst I would Love to be able to bring the property into the letting business at £350,000, remortgage and draw on the extra £105,000 at some stage in the future it doesn't feel right.

Does anyone else have any experience of similar off plan scenarios and if so what did they do and do they have any legislation to back it up.

Cheers
Dave

[Tax Accountant]

There certainly isn't any legislation to spell it out. The paragraph 45700 from the Inland Revenue Business Income Manual and the articles referred to by you are simply interpretations of the tax law. Such interpretations are not set in stone.

The article states that the relevant amount is ''the market value of the property when it is brought into the letting business. If the property had been originally bought for letting, this amount would be the purchase cost of the property.''

When is an investment property regarded as brought into a lettings business? In the case of an ongoing lettings business, I consider that this is the date when an investment property is bought.

If so, what is the date when an ''investment property'' is regarded as having been bought? Is this the date of exchange, the date of completion or the date of first letting of the investment property?

I believe that this is the date of exchange of contracts for the purchase of the property.

Ramnik