Spring 2005 Newsletter Content Home Sweet Pension Anything To Declare? Death And Taxes His And Hers Oh, Gross! We Didn't Mean It Agassi Wins Time To Go It Could Be Worse... Trivial Pursuit Re: Mortgages A Marriage Made In... Time's Money Show Business Scam Of The Decade? Gift Aid Vat's Hot! Wait For It A Good Buy? Know Your Articles Rights And Wrongs

Re: Mortgages Suppose you bought a property some time ago as a second home. It cost £100,000, and you borrowed £80,000 to buy it. It's now worth £200,000, and you have decided to let it out. What's the tax treatment? If you have ever lived in it as your main residence, or you have made an election to treat it as your main residence for CGT purposes, the capital gains treatment will be very favourable. If it's only ever been a second home, it's always been chargeable to CGT, and that doesn't change when you let it out. But any improvements you carry out will increase the cost for CGT, so you should keep the receipts. The interest you pay on the mortgage will be an allowable expense against the rent, and so will any insurance and other running expenses that you pay. So you hope that the rent at least covers your outgoings, and you continue to enjoy that capital gain in due course. What if you want some of the cash now? The Revenue have a surprisingly generous view on what happens if you remortgage when you put this property 'into a rental business'. If you increase the loan to say £150,000, they will allow you to draw out the £70,000 cash you have just borrowed, and still deduct the interest on the whole of the new loan. Many accountants find that surprising, but the Revenue seem to think that your 'landlord's balance sheet' still shows that you are in credit - the property is still worth more than the mortgage, using current values. You could get the same result by selling the first property for £200,000, then buying another similar one with a £150,000 mortgage. But that would incur more costs and, crucially, it would trigger the CGT charge. The Revenue's interpretation is much more favourable. If this plan interests you, we will be happy to discuss it. This Revenue interpretation is clearly set out in the Business Income Manual at BIM 45700, with examples to emphasise the point. Many accountants think that it is not only generous but wrong, but it is the Revenue's published view, so it is unlikely to be challenged by an Inspector. There are probably a number of variations on the basic theme of remortgaging at the point of transferring a second home into a rental business, and those variations would have to be examined carefully to check that they would be treated as favourably. It may be worth writing to the Inspector, referring to BIM 45700, to clarify the Inspector's attitude to the transactions.