There is no tax relief on purchasing your own home. Where possible, business owners should try to structure their affairs so that the business has borrowings and minimise the mortgage for the home.

The mortgage is a major outgoing for most people, and both interest and capital repayments have to be funded out of our taxed income.

For example, you would need a salary of over £1,000 per month as a 20% tax payer, or more than £1,300 per month as a higher rate tax payer, to pay £800 per month of mortgage interest.

With recession starting to bite and taking into account the difficult property market, one solution might be letting either part or all of our homes. This article sets out a number of the tax considerations

Rent-a-room relief

Rent a room relief can be claimed if you let out a room in your home. The following rules should be considered.

1. If you don’t make such an election you will be taxed on the difference between the rents you charge and directly attributable costs (such as a proportion of gas, electricity, water and general rates, repairs and of course mortgage interest).

2. If you do make such an election you will be taxed on the difference between the total rents you receive and £4,250. Expenses are ignored.

Where the property is jointly owned the £4,250 will be shared between the partners, as will the rents.

In most cases it will be necessary to work out the tax charge using both methods to see which is more beneficial.

Where the rents received from letting a room are less than £4,250 per annum (£354.17 per month) the income is entirely tax free!

Letting your home.

If you decide to move from your home and let the whole property the following points should be considered.

- You will be taxed on the rents received less attributable costs. Costs will include mortgage interest paid.

- As the property has been your principal private residence any gain that you make on subsequently selling the property will be tax free until you move out plus the last three years of ownership. Consequently if you do not let for more than three years there will be no capital gains tax to pay.

- If you let for more than three years you can also make a claim for lettings relief which is currently worth £40,000. Also, the relief is available to both owners if property is jointly owned including married couples or civil partners.

You should also be mindful in both these situations that letting or part letting of the property may be prohibited by your mortgage lender.

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Restriction of PPR

If part of your home is let it will not affect your exemption from capital gains tax, providing the ‘rent a room’ scheme applies.

HMRC publication IR87 page 9 states:

“The private residence relief is not affected if you have a lodger who is treated as a member of your family, sharing the living rooms and eating with you, even if he or she has a separate bedroom.”

Leaflet IR87 was withdrawn on 23/92005, but has been included in HMRC’s Capital Gains Manual at #64702.

http://www.hmrc.gov.uk/manuals/cg4manual/cg64702.htm

HMRC consider the number of lodgers (at any one time) to be a critical factor, they consider there should be only one lodger. However this view is debateable.

If the rent a room scheme does not apply, it is important to measure the area of the let rooms and any other space for the exclusive use of lodgers (eg do they have there own bathroom?) and compare this to the rest of the house including any shared areas. All private areas and common areas are not in the rented area.

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Many entrepreneurs have purchased commercial property that has been fully or partly occupied at various times by their business, and rent may have been charged for the use of the property; either the property owner has been paid rent by his business, or by other third parties.

The way in which the new capital gains tax rules apply to the disposal of these properties changed on 6 April 2008.

Under the new rules, all taxable capital gains are now subject to a flat 18% tax chargem with one important exception. If a disposal qualifies as the sale of a business asset you may be able to claim entrepreneurs’ relief. In which case, the first £1m of qualifying lifetime disposals are subject to tax at the reduced rate of 10%. Generally speaking the disposal of a business property should qualify for entrepreneurs’ relief as long as it is sold in conjunction with the sale or cessation of the business, or within 3 years of that date.

Obviously, if you have purchased a property for the purposes of running your business you may feel that this relief will be available to you when you sell the property. Unfortunately the position of certain property owners, particularly those who have charged rent to their business, may not be so straightforward.

The issues that affect the availability of entrepreneurs’ relief when commercial property has been rented to a business, are complex and if you have commercial property please feel free to speak to us for more details. However, we have highlighted below the fundamental difference between a disposal by a sole trader and a disposal by a partner or company shareholder.

1. Sole traders are treated differently to partners and owners of limited companies.

If you are a sole trader there would be no commercial or tax purpose in charging your business rent for the use of your property - both property and business are in your name. There could be circumstances where part of the property has been let to a third party. However as long as part of the property is in use by the owner’s business when the property is sold, a claim to entrepreneurs’ relief should be effective; at least to some extent.
2. Partnerships and limited companies.

If a partner or shareholder has purchased a property and made this available to the business for a rental payment, the CGT position on disposal is more complex. If rent has been charged by the owner to the partnership or company, a claim for entrepreneurs’ relief on sale may be precluded.

A final point. Relevant legislation has not yet completed its passage through Parliament. The Treasury are aware that a sale of a business property prior to 6 April 2008, that would have qualified for taper relief, may not now qualify for entrepreneurs’ relief; purely due to the rental payments issue. There is therefore a possibility that there may be some relaxation of the rules in any amended legislation.

If you are contemplating a sale of this type of property please contact us before completing the sale in order that we can help you organise contracts in the most tax efficient way.

written by admin \\ tags: Property Tax, Tax planning