Allowances against tax

[Chalim]

In August 2003 my wife and I used our (but mainly her) savings to purchase the leasehold on a maisonette for £195,000. We gave a one-third ownership to my daughter with the 3 of us then owning equal shares as "joint tenants". My daughter lives in the property and looks after it for us on the understanding that she shares the property with someone who pays rent to my wife and myself.

The property needed considerable work before it could be lived in or rented out (new central heating, decorating, furnishing, etc) and I have the details / receipts for this work. This, together with the costs of solicitors, surveys etc amounted to another £10,000 of expenditure.
Rent received in the last (part) tax year amounted to £3,255 (i.e. £465/month for 7 months).

I'd be grateful for advice on minimising our tax position. I'm a higher rate taxpayer; my wife pays at the standard rate (but is on the verge of being a higher rate taxpayer). I'd particularly like clarification of what expenditure is allowable against tax but assume, for example, that in these circumstances my daughter cannot claim the "rented room" concession.

[UKTAXSAVER]

There are many issues here but, to help you in your researches on property expenses, I suggest you look initially through the Revenue's booklet IR150 available on their website and in hard copy form local tax offices. It sets out their approach and attitudes to the allowability of single/ongoing expenses,items of a "capital" nature and pre-letting costs.

Be careful to ensure you pick up on changes. For example, upgrading from single glazing to double glazing caused disputes but the Revenue have now moved with the timnes and accept that the full costs of the change are allowable against the rental income for income tax purposes.

Generally speaking any expenses incurred in running/maintaining a let property would be deductible whereas capital costs of improvement (extentions, new kitchen etc) would not be.

If the property is let furnished you may also be able to claim a "wear & tear" allowance to cover the deprecating value of items used in the property. This is in place of claiming for renewals of such items. To calculate this deduction take the gross rents declared, reduce by items payable by the tenant personally (usually the council tax bill) and 10% of what's left is the deduction.

Customary costs of acquisition such as the solicitor's fees, surveys, land registry costs etc. would always be treated as additional to the cost of the maisonette and not allowabe against the rents for income tax relief.

As to the "rented room" concession I would agree and don't believe this would apply in your situation. That relief is aimed at those who rent out spare space in thier own home.

Other factors may affect the outcome of any tax planning (such as your daughter's involvement and why she does not share in the rents paid by the other tennant given that she is a part owner of the flat. I presume you have an agreement of some kind covering this).

Given that you and your wife are to be higher rate taxpayers and in receipt of this letting income it may pay you to get professional advice specifically tailored to meet your needs.

Incidentally, I assume you have notified the Revenue of this new source of letting income. There are fines and penalties for not telling the Inspector within set deadlines.

I hope you are sucessful if your researches but, if you get to the point where you feel professional help is needed, please let us know. We have all the necessary experience a you would need and have several clients declaring rental income.


Gareth C. Jones, director, Taxaccount Ltd.
www.taxaccount.co.uk
e-mail: info@taxaccount.co.uk

[Ian McTernan CTA]

You are building up a potential tax liability for the future- the gift of the third share is a PET for IHT purposes, and as far as CGT is concerned her third share is covered by PPR exemption, but you and your wife will incur CGT on the sale of the property in the future.

Your daughter is entitled to one third of the rental income and will need to declare this on her return in due course.

You might want to consider gifting the rest of the property to her and suffering any CGT hit now, this will be a PET for IHT purposes and can be insured for any IHT becoming payable on your death. She would then own the entire property and be able to claim the rent a room relief for the rental income.

If you would like someone to run through the figures for you I would be pleased to assist on a professional basis.

Ian McTernan CTA
McTernan Associates Ltd
Chartered Tax Advisers
ian@imcternan.com