Couple of property (tax) questions

[Tim Woodall]

I've a couple of questions relating to taxation of property if someone
can help me. If you can point me to the relevant pages on hmrc then even
better.

1. If you have multiple properties that you live in then you can
nominate one of them as your primary residence. Once you've done the
nomination you can change it at any time. So for capital gains purposes,
provided you make a nomination then it's fairly obvious how to calculate
any tax liability if and when you come to sell.

Additionally there is council tax to pay on an ongoing basis. You get
(typically) a 10% council tax discount for a second property and, I
believe, you do not get the 25% single person discount even if you are
the only person living there. So if you are a single person with two
properties you will get 25% discount on one and 10% discount on the
other. Does the primary residence (25% discount) have to match the
primary residence for capital gains tax purposes or are the two
independent?


2. If you have a rental business that has no borrowings then there is
capital in the business matching what was put in when the business was
set up. You can withdraw that capital by borrowing against the rental
property and any interest on the borrowing will be an expense that can
be deducted from the rental income. I've found the pages on hmrc for
this case. But does the borrowing have to be secured on the rental
property? If I have borrowings against another property can I, as a book
keeping exercise only, apportion some of that borrowing to the rental
property or do I need to get a separate loan and then use that loan to
pay off some of the borrowing on the non rental property?


Thanks,

Tim.

 

[tim.....]

I've a couple of questions relating to taxation of property if someone
can help me. If you can point me to the relevant pages on hmrc then even
better.

1. If you have multiple properties that you live in then you can
nominate one of them as your primary residence. Once you've done the
nomination you can change it at any time. So for capital gains purposes,
provided you make a nomination then it's fairly obvious how to calculate
any tax liability if and when you come to sell.

Additionally there is council tax to pay on an ongoing basis. You get
(typically) a 10% council tax discount for a second property and, I
believe, you do not get the 25% single person discount even if you are
the only person living there. So if you are a single person with two
properties you will get 25% discount on one and 10% discount on the
other. Does the primary residence (25% discount) have to match the
primary residence for capital gains tax purposes or are the two
independent?

No. You nominate your PPR based upon your own personal choice. As long as
the property is "available for your own use" for 365 days of the year it
can be your PPR even if you only visit if for one day (or even, not at all).

Your principle residence for CT purposes will be decided upon which one is,
in fact, your principle place of residence, which would normally be the one
that you spend the majority of your time, though other factors such as where
you keep your personal belongings, are registered to vote, have personal
post sent to etc, will be taken into account in marginal cases.

In the first instance you nominate your choice of first home for CT purposes
yourself, but councils are at liberty to challenge this nomination if they
think otherwise (quite how they might find out your lifestyle is anyone's
guess).

2. If you have a rental business that has no borrowings then there is
capital in the business matching what was put in when the business was
set up. You can withdraw that capital by borrowing against the rental
property and any interest on the borrowing will be an expense that can
be deducted from the rental income. I've found the pages on hmrc for
this case. But does the borrowing have to be secured on the rental
property? If I have borrowings against another property can I, as a book
keeping exercise only, apportion some of that borrowing to the rental
property or do I need to get a separate loan and then use that loan to
pay off some of the borrowing on the non rental property?

No, no and no.

If you have a rental business which currently has no borrowings and you want
to use the property in the business as equity for a loan (which I think is
what you are asking), whether the interest is deductable for tax (against
rental income) depends upon the use that you put that money to, not the item
that it is secured on.

So if you borrow money against the rental properties to pay for a round-
the-world-cruise then you cannot set the interest off against the rental
income even if the loan is secured on the rental property.

OTOH, if you borrow some money to buy a new properly to add to the business,
the interest on that loan is deductable against the rental income,
regardless of how the loan is secured.

Of course they are a lot of grey areas here and there are (no doubt) many
people who do (1) and get away with it, but that doesn't' make it legally
the right answer

tim

 

[Robin]

If you have a rental business which currently has no borrowings and

you want to use the property in the business as equity for a loan
(which I think is what you are asking), whether the interest is
deductable for tax (against rental income) depends upon the use that
you put that money to, not the item that it is secured on.

IIRC it is now well-established that the original capital can be
withdrawn from a business (including a property business). Again IIRC,
it is covered in HMRC's BIM, with examples (I CBA'd to look to check!),
which is what I assume the OP has found.

So if you borrow money against the rental properties to pay for a
round- the-world-cruise then you cannot set the interest off against
the rental income even if the loan is secured on the rental property.

Sorry, I think that is exactly what can be done provided the borrowing
does not exceed the capital introduced into the business. In other
words, and oversimplifying dangerously, you cannot get relief for more
than you put into the business in cash or kind.

I *think* the loan has to be secured against the property in the
business, else the balance sheet of the business just don't work.

Might be worth asking/cross-posting to uk.business.accountancy. Or put
into the search engine of your choice "withdrawing capital from a
property business".

 

[Tim Woodall]

IIRC it is now well-established that the original capital can be
withdrawn from a business (including a property business). Again IIRC,
it is covered in HMRC's BIM, with examples (I CBA'd to look to check!),
which is what I assume the OP has found.


Sorry, I think that is exactly what can be done provided the borrowing
does not exceed the capital introduced into the business. In other
words, and oversimplifying dangerously, you cannot get relief for more
than you put into the business in cash or kind.

I *think* the loan has to be secured against the property in the
business, else the balance sheet of the business just don't work.

Might be worth asking/cross-posting to uk.business.accountancy. Or put
into the search engine of your choice "withdrawing capital from a
property business".

Thank you to both of you for your answers. I agree with the above that
capital can be withdrawn. I can accept that the loan might have to be
secured on the property but I don't really see why it has to be other
than, perhaps, "because it does."

It also seems slightly perverse that a BTL loan would be deductible. So
if I pay money to a bank to setup such a loan and then pay less tax
(because the interest rate will be higher) then it's OK. I shall have to
do the sums to see if it's actually worth it in my case.

I shall probably try calling the tax office to see what they say and if
I get any definitive answers I'll post back here but it won't be for a
week or two.

Tim.

 

[Robin]

I can accept that the loan might have to be

secured on the property but I don't really see why it has to be other
than, perhaps, "because it does."

Coming back to it, I don't think the loan has to be secured on the
rental property (or at all). Working capital for many businesses is in
the form of an overdraft secured on houses which are in no way business
assets. But HMRC may not agree So I'd recommend you maintain an
explicit balance sheet & capital account.

I shall probably try calling the tax office to see what they say and
if I get any definitive answers I'll post back here but it won't be
for a week or two.

I'd say there's not much chance you will get the "definitive" answer
over the phone: the tax office staff only have access to the guidance in
the BIM and PIM which you can read online. So if you get the answer you
want I urge you to note the date and name of the person you spoke to and
write to them to record it. If it's not the answer you want then you
could write and ask them to refer it to head office

 

[Peter Saxton]

IIRC it is now well-established that the original capital can be
withdrawn from a business (including a property business). Again IIRC,
it is covered in HMRC's BIM, with examples (I CBA'd to look to check!),
which is what I assume the OP has found.


Sorry, I think that is exactly what can be done provided the borrowing
does not exceed the capital introduced into the business. In other
words, and oversimplifying dangerously, you cannot get relief for more
than you put into the business in cash or kind.

I *think* the loan has to be secured against the property in the
business, else the balance sheet of the business just don't work.

Might be worth asking/cross-posting to uk.business.accountancy. Or put
into the search engine of your choice "withdrawing capital from a
property business".

Tim is right. It may be possible by moving money around to get tax
relief and still have a round the world cruise but you have to use the
money in the business to get tax relief on the interest. You don't
need to have any loan secured on the assets.

 

[Robin]

Tim is right. It may be possible by moving money around to get tax

relief and still have a round the world cruise but you have to use the
money in the business to get tax relief on the interest.

I had thought it was now a routine arrangement following the publicity
given to HMRC's guidance, published some years ago now, on the way it
viewed withdrawal of capital. Indeed, in example 1 in BIM45700[1] Ms D
could for all we know be withdrawing capital to pay for a RTW cruise.
That doesn't stop her getting relief for the interest on the loan taken
out to provide the replacement working capital. That and similar
arrangements are indeed "moving money around". But they are also ISTM
just what Tim Woodall was proposing to do.

[1] for ease of refeernce:
http://www.hmrc.gov.uk/manuals/bimmanual/BIM45700.htm