let-to-buy help please!!!
Discussion
If anyone can help with the following it would be much appreciated:
I own my house (no mortgage). I intend to buy another house with my girlfriend. In order to do this I would like to remortgage my existing property and use the cash to buy the new house. I would then rent out my "first" house. My questions relate to the tax implications - firstly, is it correct that I can only offset the original purchase price of the house against tax, not the full amount of the mortgage? Secondly, and more worryingly, I have been advised that as I am doing a let-to-buy as opposed to a buy-to-let, I cannot actually offset the mortgage payments against the tax at all. Supposedly the taxman is only interested in what the money (ie the cash raised by the mortgage) is used for - in this case to buy a house for me to live in, which is not related to the rental property. I cannot therefore offset the interest on the mortgage payments against the rental income, leaving me with a large tax bill.
Apologies if the above is a bit of a mess. I have received so many conflicting answers regarding the tax implications that I really haven't got a clue.
I own my house (no mortgage). I intend to buy another house with my girlfriend. In order to do this I would like to remortgage my existing property and use the cash to buy the new house. I would then rent out my "first" house. My questions relate to the tax implications - firstly, is it correct that I can only offset the original purchase price of the house against tax, not the full amount of the mortgage? Secondly, and more worryingly, I have been advised that as I am doing a let-to-buy as opposed to a buy-to-let, I cannot actually offset the mortgage payments against the tax at all. Supposedly the taxman is only interested in what the money (ie the cash raised by the mortgage) is used for - in this case to buy a house for me to live in, which is not related to the rental property. I cannot therefore offset the interest on the mortgage payments against the rental income, leaving me with a large tax bill.
Apologies if the above is a bit of a mess. I have received so many conflicting answers regarding the tax implications that I really haven't got a clue.
lemmonie said:I know I ask my accountant the tricky questions
seriously though Tonker and Yiw and Mr TT (i think) seem to know a bit about that stuff as does Incorrigible i think
Basically mortgage the rental house as much as you can, as the mortgage offsets the income, reducing tax (you only pay income tax on the net income)
It is very simple, in short there are no tax implications.
Raise the money off the first house
buy second house
rent first house out
live in second house
you have 3 years worth of untaxable equity growth on the first one before CG tax is due, and then only above what it is worth at the time eg: house 1 worth 100k, in 3 years worth 140 in 4 years worth 150. if you sell it after 4 years you pay tax on 10k, easy.
or sell, settle mortgage, move to house 3 using equity on house 2 4 collateral, rent house 3 you get 3 more years. I do this all the time
Greg
Raise the money off the first house
buy second house
rent first house out
live in second house
you have 3 years worth of untaxable equity growth on the first one before CG tax is due, and then only above what it is worth at the time eg: house 1 worth 100k, in 3 years worth 140 in 4 years worth 150. if you sell it after 4 years you pay tax on 10k, easy.
or sell, settle mortgage, move to house 3 using equity on house 2 4 collateral, rent house 3 you get 3 more years. I do this all the time
Greg
Thanks all. The confusion has arisen after speaking to a friend of mine who is an accountant, though not a tax specialist. My understanding is basically that I should do as Incorrigible says - raise the mortgage as high as possible and offset that against the income tax. But the accountant says if I originally bought the house for £100k, and it is now worth £200k, that I can only offset £100k's worth of interest payments against the rent, regardless of how big the mortgage is 
And as for the second part, about not being able to offset the mortgage at all, well that went right over my head!
I guess I should do as Rotaree says, and talk to the tax office themselves. I just have an irrational fear that they will assume I am completely minted (which I am not) and will think of some brand new tax, just for me.
And as for the second part, about not being able to offset the mortgage at all, well that went right over my head!
I guess I should do as Rotaree says, and talk to the tax office themselves. I just have an irrational fear that they will assume I am completely minted (which I am not) and will think of some brand new tax, just for me.
Agree with Incorrigible on this, but would suggest you talk to an accountant (I thought knowing about tax liability was their job 
) before you talk to the tax office. Tax office people are fine when you go to them and say you know you owe tax and here it is, but if you go saying 'I think I might want to do this, how much tax will it be? That much? Oh, okay well I won't do it then.' They'll be all over you like a Burton's suit to make sure you don't evade tax for anything else - they trust no-one, but as long as you give them something, they stay sweet.
) before you talk to the tax office. Tax office people are fine when you go to them and say you know you owe tax and here it is, but if you go saying 'I think I might want to do this, how much tax will it be? That much? Oh, okay well I won't do it then.' They'll be all over you like a Burton's suit to make sure you don't evade tax for anything else - they trust no-one, but as long as you give them something, they stay sweet.steve 944t said:
But the accountant says if I originally bought the house for £100k, and it is now worth £200k, that I can only offset £100k's worth of interest payments against the rent, regardless of how big the mortgage is
Not heard of that. I've remortagaed rented properties in order to release capital to buy other properties on several occasions and I've always claimed the full mortgage against the rental income. My current mortgages on my buy to lets are all higher than the original purchase price and I claim the full mortgage back. In fact the property I live in only has a very small mortgage and was almost entirley financed by borrowing against the let properties.
Speak to an accountant that specialises in this sort of thing and also speak to the tax office.
) greg_d said:
house 1 worth 100k, in 3 years worth 140 in 4 years worth 150. if you sell it after 4 years you pay tax on 10k, easy.
Greg
I am in the same position and thinking about keeping my current house when I move. I bought this house (my only house) in 1999 for £87,000, it's now valued at £200,000. If I buy another house and rent out my current house and then but sell it in 4 years time. If the house is valued at £225,000 in 4 years time i.e I have one year of CGT liability does that mean I owe tax on a quarter of the price difference of 225,000-200,000 or a 9th (as I will have had the property for 9 years but only liable for CGT on one) on the difference of 225,000-87,000. I know that there are indexed releifs etc. But my concern is that if the property market staganates or fall in the next few years I could be liable for a tax bill even though the property may have declined in vlaue over the 4 years I've rented it out since it stopped being my primary residence.
thanks
You can NEVER claim the full mortgage repayment against rental income. What you CAN claim is the INTEREST element of the repayment. However, sometimes mortgage repayments can be "interest only" which means that, in effect, the monthly mortgage repayments are the same as the monthly mortgage interest charges.
When you rent out a property you can offset the following items of expenditure:
Loan interest on borrowings to finance the purchase of the propery (mortgage interest).
Repairs and maintenance costs.
Legal Fees re. collection of rents (not re. the purchase or sale of the property)
Management fees - usually paid to property agents if you use such organisations to manage the rents on your behalf.
Rates/Council Tax/Water Charges - if paid by the landlord rather than the tenant.
Garden maintenance - if paid for by the landlord.
In addition, if you rent the property fully furnished, you can claim an annual 10% Wear and Tear allowance. The 10% is calculated against the Gross Rents Reveived AFTER deducting Rates/Council Tax/Water Charges. Alternatively, you can pass up on the 10% claim and substitute the real costs incurred in replacing futrniture.
The rental income details are returned every year on the "Land and Property Supplementary Pages" of the annual Self Assessment tax form.
Capital Gains Tax raises its ugly head when it's time for the property to be sold.
When calculating the "Gain", you eseentially offset the proceeds of the sale against the original purchase cost. You also offset legal and estate agent fees which you will have incurred when you bought and sold the property before arriving at the net gain. Any Capital Costs spent on the peoperty after the original purchase date can be added to the original purchase price before arriving at the net gain.
If you have owned the property for more than 3 years, "Taper Relief" is applied to the gain. This helps reduce the effect inflation will have had in boosting your gain.
Finally, you will be able to offset your annual Capital Gains Tax exemption against your own personal share of the gain. The exemption is currently £7,900 but it tends to increase slightly eavh year.
If you have lived in the property you subsequently rented out, you may have the opportunity of mitigating your Capital Gains Tax bill even further by claiming it as your Principal Private Residency (PPR)for a certain number of years. As you are now living in a different property, you would normally consider this one to be your PPR but having two properties that you have lived in does give you some level of choice.
Finally, there could be Inheritance Tax (IHT) issues. You are buying this property with a "girlfriend" rather than a "wife". If one of you were to depart this mortal coil, you might find that the transfer of the deceased's half share in the property to the surviving joint owner could result in an IHT bill. Transfers of properties between married couples are trotally exempt from IHT.
There, that's enough to get on with for the moment.
When you rent out a property you can offset the following items of expenditure:
Loan interest on borrowings to finance the purchase of the propery (mortgage interest).
Repairs and maintenance costs.
Legal Fees re. collection of rents (not re. the purchase or sale of the property)
Management fees - usually paid to property agents if you use such organisations to manage the rents on your behalf.
Rates/Council Tax/Water Charges - if paid by the landlord rather than the tenant.
Garden maintenance - if paid for by the landlord.
In addition, if you rent the property fully furnished, you can claim an annual 10% Wear and Tear allowance. The 10% is calculated against the Gross Rents Reveived AFTER deducting Rates/Council Tax/Water Charges. Alternatively, you can pass up on the 10% claim and substitute the real costs incurred in replacing futrniture.
The rental income details are returned every year on the "Land and Property Supplementary Pages" of the annual Self Assessment tax form.
Capital Gains Tax raises its ugly head when it's time for the property to be sold.
When calculating the "Gain", you eseentially offset the proceeds of the sale against the original purchase cost. You also offset legal and estate agent fees which you will have incurred when you bought and sold the property before arriving at the net gain. Any Capital Costs spent on the peoperty after the original purchase date can be added to the original purchase price before arriving at the net gain.
If you have owned the property for more than 3 years, "Taper Relief" is applied to the gain. This helps reduce the effect inflation will have had in boosting your gain.
Finally, you will be able to offset your annual Capital Gains Tax exemption against your own personal share of the gain. The exemption is currently £7,900 but it tends to increase slightly eavh year.
If you have lived in the property you subsequently rented out, you may have the opportunity of mitigating your Capital Gains Tax bill even further by claiming it as your Principal Private Residency (PPR)for a certain number of years. As you are now living in a different property, you would normally consider this one to be your PPR but having two properties that you have lived in does give you some level of choice.
Finally, there could be Inheritance Tax (IHT) issues. You are buying this property with a "girlfriend" rather than a "wife". If one of you were to depart this mortal coil, you might find that the transfer of the deceased's half share in the property to the surviving joint owner could result in an IHT bill. Transfers of properties between married couples are trotally exempt from IHT.
There, that's enough to get on with for the moment.
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