Rebasing value of rented property

[NoTaxEver]

Hello,

Interest on mortages for rented property is only allowable on the initial value, either by purchase price or the value when a former home is let.

I have a property that has been let for a long time which used to be my own home. Using the above rule I can only claim interest against rent on about 37% of its cuurent market value.

I have calculated that if I sold it under the current tax rules I would have to pay about £1000 cgt, or less if capital improvements are taken into account.

My question is this, is it possible to 'bed and breakfast' property as people used to do with shares?

If I sell the house to someone I trust, pay the cgt and have the transaction registered with the land registry and then buy it back again, would I then be able, from a tax point of view, to borrow up to 100% of its new purchase value?

Assuming that credit is available again, when I do this I would then have as much as £80k spare to offset against the mortage on my own house.

Any thoughts?

[Peter D]

If this was your home then PPR exemption and letting relief apply, have you taken them into account to arrive at the CGT liability. http://www.hmrc.gov.uk/budget2006/bn27.htm
addresses B&B but B&B on property is classed as avoidance since about the budget 2006. Regards Peter

[JSK TAXATION]

NoTaxEver

I think you would need to be careful with this situation and I say this for the following reasons:

If the property is sold from and back into your ownership then Stamp Duty Land Tax would be payable twice as would conveyancing fees. If the property is gifted, then SDLT would be payable to the extent that the property was mortgaged. There would also be inheritance tax consequences in this latter scenario,

Assuming you are not proposing to live in the property after re-establishing ownership, then there will be no possibility of obtaining PPRR second time around. This would also deny a claim for lettings relief and would subject any future gain to a straight 18%. In contrast, marginal gains made from now on will still attract proportionate PPRR and lettings relief's,

Whilst you currently can only claim interest at 37% of the property's current value, it is not clear from the info provided whether you would in reality be able to utilise any additional loan interest claim. Remember income from property losses can only be set against other IFP profits OR carried forwards against future IFP profits.

What maybe worth considering is moving back into the property to use as your main residence and then let it out again in the future. With careful planning, you may be able to get the best of both worlds!

John S King
Chartered Tax Adviser
www.taxation-advice.com

[NoTaxEver]

Hello,

I have taken into account the letting reliefs and the property value is below the stamp duty level. The fees involved in the conveyancing are not that expensive. The last time I bought a property of this type (2006) the fees were about £350. In this case I would not need searches unles I bought it with a mortgage, which I will if I can.

From what I have read on this site and others, provided my total rental property borrowing does not exceed the total initial asset value, then the interest on the loan would be allowable.

The property would not be finally disposed of in the near future (10-15 yrs). It is my intention to go through all my properies one by one as PPR when I no longer need my own house. Moving once a year would not be a great hardship.

I gather from the b&b rules there needs to be reasonable gap between sale and re-purcahse. How can b&b on property be avoidance if the tax due is paid?

NoTaxEver

[JSK TAXATION]

NoTaxEver,

When you say total initial value, presumably you mean the value of the property at the later of:

The date it was acquired (if acquired specifically to rent out) OR

The date the property was appropriated to your property investment business (if used for other purposes beforehand).

I do not see that the transaction can fall under the rules for B&B securities as mentioned by Peter. However, I would take care to ensure that the first disposal is one which is unfettered and unconditional particularly as regards to any buy back agreement. It is possible if HMRC could prove there was intention to buy the property immediately back at the same or similar price, that there was never a disposal in the first place.

This is confirmed at s22 (1) TCGA 1992 which states that "... a disposal takes place when a capital sum is derived from an asset notwithstanding (situations where) no asset is acquired by the person paying the capital sum...."

If you need help attending to this proposed transaction please let me know. Kind regards,

John