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Tax free sales
mortgage payment not just the interest) could now face arrears of
• Most people are aware that the sale of your “main residence” is
tax plus interest and penalties. This may result in landlords having to
tax exempt. Helpfully, if you buy a new home before selling your
sell the property to pay the tax bill, despite the falling market.
old home the last three years of ownership of any property that has
been your “main residence” are also tax-exempt.
• The basic rule for deducting interest on money borrowed is that the
interest must be paid for the 'business' of the letting. The Revenue
One corollary of this is that in a difficult property market when
include in this calculation money borrowed up to the value of a
house values fall, you can not generally make an allowable tax
property which was formerly your main home but is now let
loss on the sale of your home.
regardless of how you use that money, and also money borrowed
to fund improvements or repairs. You could also claim relief for
• If you have a second home, this will generally be within the charge
money borrowed on security of an existing property which has risen
to tax, but it is possible to make an election, within two years of
in value when that money is used to buy another letting property.
buying the second property (or any subsequent property) to state
which is to be treated as the tax-free main residence. If you do not
On the other hand, if a property has gone up in value and you
make the election, the Revenue will exempt from tax the property
borrow money for some other purpose, perhaps to help a
you live in most. daughter buying a flat, then HMRC will restrict the interest relief they
will allow . So if originally you borrowed £80,000 to buy a £100,000
If you buy a second home, it is therefore possible to “elect” for your buy to let house, and now you increase the mortgage to £120,000
holiday home to be your main residence, and then one month because the house has gone up in value, and give the extra
later to “re-elect” your old home as the tax-free main residence. £40,000 to your daughter, then you will only be able to claim tax
On an eventual sale of the first house, one month’s worth of the relief on 80/120 X the interest you pay on the increased mortgage.
final gain will then be taxable, and on a sale of the second house,
three years and one month’s worth of the gain will be exempt.
• You may have to pay tax when you sell, even if you have negative
equity. Take a rental property bought in 2000 for £150,000, and re-
For example, you buy a flat in London in 1997 for £200,000. Six
mortgaged, following an increase in property values for £225,000
years later, you buy a country house for £400,000. You “elect” the
when it was worth £300,000. It is now sold at auction for £200,000.
country house for one month and then “re-elect” the London flat
You have to find £25,000 more than the sale price to repay the
as your main residence. In 2008, five years after this, you sell both
mortgage and £9,000 for the tax man, as over the period of your
properties for £600,000 each. Your capital gain on the flat is
ownership the property has gone up by £50,000, taxed at 18%
£400,000. You have owned it for 11 years / 132 months. 1/132 x
(excluding the annual exemption).
£400,000 = £3,030 is taxable. Your capital gain on the house is
£200,000. You have owned it for five years / 60 months. 37 months
are exempt so 23/60 x £200,000 = £76,667 is taxable, giving total
Buying property
taxable gains of £79,697. Without the elections, the flat would
• If you have bought “offplan” and not resold, and the current value
have been wholly exempt and the £200,000 gain on the house
has dropped, or it is unlikely you will find tenants, stop and think.
would have been wholly taxable.
You may be able to walk away and lose your deposit. This could
be cheaper than completing with immediate negative equity and
• Homeowners can rent out rooms in their home and if the annual
insufficient rental income to cover a the mortgage. If you do, you
rent is less than £4,250, no tax is due, but no expenses are
will avoid paying Stamp Duty Land Tax too.
deductible. Where receipts exceed that amount, which has not
changed for over 15 years, then an income and expenditure
account needs to be prepared. Claiming “rent a room” relief does
• One of the ways in which parents can help get children onto the
not jeopardise the main residence capital gains tax relief.
property ladder is by making a gift to fund the deposit. In order to
safeguard that amount, it could be put in by way of a trust. The
parent, as trustee, can ensure no further borrowings are taken out
on the property without their knowledge, and if the child and
• The unintentional landlord, who lets his old house when he buys
his/her partner split up, the “ex” cannot get a share in your deposit.
another because the old house will not sell, will still get full main
residence relief on an eventual sale if he sells within three years of
• “Swaps” between family members can be attractive, whereby a
moving out; otherwise, he will be eligible for “letting relief” of a
parent “downsizes” to their child’s house and releases equity and
maximum of £40,000 (£80,000 if husband and wife own the
the child buys the family home. For Stamp Duty Land Tax purposes,
house) on the chargeable gain. He will not get tax relief on
for swaps between members of a family, you now look at the
expenses incurred (including mortgage interest) in getting the
individual property values, not the aggregate value of property
property into a lettable state.
transferred. For example, if property worth £450,000 is exchanged
for property worth £125,000 the rate of SDLT will be nil on the
• Landlords who have been letting their property for a long while
property worth £125,000 and 3% on the property worth £450,000
should ensure they have properly declared the rent received. They
(£13,500). For unconnected parties the tax would be on the
may now be coming under the Revenue’s microscope, following combined value of £565,000 at 4%, or £22,600.
the launch of their property income campaign earlier this year. A
person who has not been declaring rent, or has made mistakes in • Employees who relocate can claim up to £8,000 tax-free on
his claims for tax-deductible expenses (such as claiming all the certain relocation expenses.
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