Reply to: Offset rental income of one property against mortgage interest on another

[Ketchup]

Thank you for all the advise, It really has made me think very hard about this, especially the scenario NLUK raised about if we fall out, she could try and force a sale, or worse still move her kids and herself into the jointly owned flat and a court would be reluctant to evict them until the children were 18.

[eek]

I think there is a way out of this but it ain't simple.

Can you afford to buy in Enfield Chase without a mortgage?

You can then mortgage Enfield Chase to create the deposit on the council flat and offset both that mortgage and the mortgage on the council flat against the council flat.

You won't however be able to offset anything against the Enfield Chase house due to the issue NLUK highlights.

[Jessica@WhiteFieldTax]

I would check the wording of this year's finance bill - I believe this is going away.

Don't recall anything significant or life changing on property letting? Nothing coming to us on our usual "act now for your clients benefit" sources.

[Jessica@WhiteFieldTax]

Having a quick google turned up this: link

They claim to be a chartered accountant and say:

Yes, but that quote is condensing several pages of tax legislation into a sound bite. Devil is in the detail.

NLUK is on the right track with his extract from HMRC

[northernladuk]

Bit lost in what is being offset against what but it appears if you are letting for below market rent you can only claim relief up to the amount of rent...... or none at all as letting to family fails wholly and exclusively rule it seems...

Deductions: specific items: properties not let at a commercial rent

nless the landlord charges a full market rent for a property (and imposes normal market lease conditions) it is unlikely that the expenses of the property are incurred wholly and exclusively for business purposes ( PIM2010). So, strictly, they can’t be deducted in arriving at rental business profits. However, if the taxpayer lets a property below the market rate to, say, a relative (as opposed to providing it rent-free), they can deduct the expenses of that property up to the rent they get from it. This means that the uncommercially let property produces neither a profit nor a loss, but the excess expenses cannot be carried forward to be used in a later year.

and I think the humdinger here is at the bottom...

Statute
In order to compute the profits of a rental business, all the rents and expenses of that business are pooled together. However, by applying trading income principles we ensure that an uncommercially let property is not subsidised for tax purposes by others.

To be allowable, expenses must be wholly and exclusively for the purposes of the rental business - ICTA88/S74 (1) (a) and ITTOIA05/S272. In particular relief for the maintenance of the taxpayer’s family or establishment is excluded.

If a property is occupied rent free, it is completely outside the property income regime - there is no exploitation of it as a source of rents or other receipts - ICTA88/S15 (1) 1 (2) and ITTOIA05/S266 (1).
If a property is let at less than the full commercial rent, any expenditure relating to that property will normally have been incurred partly for a benevolent or philanthropic purpose and will consequently fail the ‘wholly and exclusively’ test in ICTA88/S74 (1)(a) and ITTOIA05/S272. Although, in strictness, no expenditure on such properties is admissible as an expense of the rental business, expenses can be deducted up to the amount of rent derived from that property.

which means I might have just proved my previous post wrong.

[Moscow Mule]

Having a quick google turned up this: link

They claim to be a chartered accountant and say:

I would check the wording of this year's finance bill - I believe this is going away.

[Ketchup]

AFAIRR - and I'ld have to research to check - properties which are not let commercially can't be pooled.

In other words costs on the flat "rented" to g/f for £0 will be streamed separately.

Also, tax relief runs on use of funds not their security. Eg if you mortgage property A to buy property B, tax relief is against B even though the mortgage is on A. Don't know if that effects you, TLDR.

Having a quick google turned up this: link

They claim to be a chartered accountant and say:

With UK Property income, all income (rental) is assessed on an accruals basis for each year. If you have multiple properties, the way that HMRC treat all of this property income is that they pool this all together and classify it as a ‘single business’.

[Jessica@WhiteFieldTax]

AFAIRR - and I'ld have to research to check - properties which are not let commercially can't be pooled.

In other words costs on the flat "rented" to g/f for £0 will be streamed separately.

Also, tax relief runs on use of funds not their security. Eg if you mortgage property A to buy property B, tax relief is against B even though the mortgage is on A. Don't know if that effects you, TLDR.

[northernladuk]

I may be being shortsighted but i can't see what could go wrong. We would jointly own 1 property, we would have a deed of trust showing i own 95% and she owns 5% (with land registry) and an agreement drawn up saying we agree not to sell for 5 years (so we don't have to pay back the RTB discount) and if one of us wants to sell, the repayment of the discount and early redemption charges on the mortgage come out of their half.

When the 5 years is up, i could buy her out and she would have her 5% lump plus whatever she has saved from living rent free for 5 years.

Ironically, a few years ago i had a problem with an ex and a house we owned as joint tenants, and a loan from my dad for the deposit. So i am reasonably familiar with the process of orders for sale, deeds of trust, charges against properties and would be seeking legal advice.

The only risk is an emotional one, whether we would want to be financially tied if we fell out or is one of us started a new relationship. This is a risk we both have to take, and over the 3 years we have been together we have broken up a few times and started seeing other people but still remained friends. My reason for doing this is as much for her as it is for me, she has got 2 amazing daughters, but if they stay where they are they could easily go down the wrong road, there are a lots of people around where she lives who come from a long line of single mums who have all lived in the same council estate and never amounted to anything. One of her girls is very intelligent, but the local school is at the bottom 10% of all schools in the country, but 2 of the schools she would be in the catchment area of are in the top 15%. If i was doing this just for me, i would buy her place, give her a years rent for somewhere and part company there. The social housing in areas near decent schools is impossible to get as everyone has the same idea, and we tried to find her places that accept DSS but they are very expensive and her allowance will only just cover half.

Don't have to spell it out to me. Am a miserable Yourkshire git so this situation doesn't even exist in my world I am afraid. Just sounds like an utter disaster with a ton of things that can go wrong. Money brings out the worst in people and money and friends do not mix but anyway, you are doing what you think is right, don't have to explain it to me.

I would check if you are eligible first and then investigate consent to let. I think either of these could be your problem.

[Ketchup]

I would hardly call getting into a long term financial arrangement with a soon to be ex when you are living abroad a comparison to running a LTD company.

My point wasn't about the moral issues, it is about the amount of risk you are taking on and what you will lose when it goes wrong but it's your risk so fair enough.

I may be being shortsighted but i can't see what could go wrong. We would jointly own 1 property, we would have a deed of trust showing i own 95% and she owns 5% (with land registry) and an agreement drawn up saying we agree not to sell for 5 years (so we don't have to pay back the RTB discount) and if one of us wants to sell, the repayment of the discount and early redemption charges on the mortgage come out of their half.

When the 5 years is up, i could buy her out and she would have her 5% lump plus whatever she has saved from living rent free for 5 years.

Ironically, a few years ago i had a problem with an ex and a house we owned as joint tenants, and a loan from my dad for the deposit. So i am reasonably familiar with the process of orders for sale, deeds of trust, charges against properties and would be seeking legal advice.

The only risk is an emotional one, whether we would want to be financially tied if we fell out or is one of us started a new relationship. This is a risk we both have to take, and over the 3 years we have been together we have broken up a few times and started seeing other people but still remained friends. My reason for doing this is as much for her as it is for me, she has got 2 amazing daughters, but if they stay where they are they could easily go down the wrong road, there are a lots of people around where she lives who come from a long line of single mums who have all lived in the same council estate and never amounted to anything. One of her girls is very intelligent, but the local school is at the bottom 10% of all schools in the country, but 2 of the schools she would be in the catchment area of are in the top 15%. If i was doing this just for me, i would buy her place, give her a years rent for somewhere and part company there. The social housing in areas near decent schools is impossible to get as everyone has the same idea, and we tried to find her places that accept DSS but they are very expensive and her allowance will only just cover half.

[northernladuk]

My question was of a legal/accounting nature not a morality one hence it was posted in this forum.

It could be argued that by contracting through a LTD company we are abusing the system, but this is not questioned on here as we are all in the same boat.

I would hardly call getting into a long term financial arrangement with a soon to be ex when you are living abroad a comparison to running a LTD company.

My point wasn't about the moral issues, it is about the amount of risk you are taking on and what you will lose when it goes wrong but it's your risk so fair enough.

I think your consent to let is your first problem. Many lenders now make you sign something to say you will not let the property for a few years to avoid getting in to this situation. What you are trying to do is use a normal mortgage as a BTL from the off. I think you are going to struggle with this. What I certainly wouldn't do is be dishonest though. They can withdraw the deal if they find out and your insurances may be invalid.

I would hope to god that this scheme has safegaurds in that stop people buying and then renting though. That isn't the point of it isn't it? What about the question about being a tenant for 5 years?

Why not draw up a tenancy agreement with the charge of 1p per month. At least then you can prove she is a signed up tenant. Your income from both properties would be £2000.01. You are bringing income from both so no problems about offseting interest off that income.

Looks like a whole host of issues gotta go your way to make this work. Depends on how legit you want to be I guess.

[Ketchup]

Are you planning on using a Ltd co as a vehicle for the holding of the flat? If so you may find you'll be liable for BIK.

I think you'll fall foul of the using the tax relief on the second property. Otherwise wouldn't everyone just get a BTL mortgage and rent it to themselves/girlfriend for nothing and claim tax back on the interest.

I was planning on keeping this away from my ltdco.

I was hoping there was a way ogrouping together all BTL properties and offsetting the rent of all properties against the mortgage interest incurred against all.

[Sockpuppet]

Are you planning on using a Ltd co as a vehicle for the holding of the flat? If so you may find you'll be liable for BIK.

I think you'll fall foul of the using the tax relief on the second property. Otherwise wouldn't everyone just get a BTL mortgage and rent it to themselves/girlfriend for nothing and claim tax back on the interest.

[Ketchup]

My question was of a legal/accounting nature not a morality one hence it was posted in this forum.

It could be argued that by contracting through a LTD company we are abusing the system, but this is not questioned on here as we are all in the same boat.

[northernladuk]

A girl i have been seeing (and currently live with) has a council flat in Islington, it is worth £350-£400k. She wants to move further north (Enfield Chase) as there are better schools for her daughter who will be starting secondary school next year.

I moved in with her a year ago as it is closer to my client co. We both acknowledge the relationship isn't a long term one, as i am looking to move abroad evenutally.

She is eligible to buy her flat with a right to buy discount of £100k, but she does not have the means to finance it. What i have suggested is:

1)We buy her flat as joint tenants, i own 95% she has 5% (charge registered with land registry and deed of trust drawn up).

2) I buy a BTL mortgage on a house in Enfield Chase which she rents off me for nothing.

3) I get a "consent to lease" on the mortgage on the flat and rent it out for around £2k a month (amazingly no restriction on this with islington council, i have confirmed). this covers the mortgage on both properties.

4) in 5 years time i buy her out of the 5% on the flat

My question is, during the 5 years she is renting the house off me for nothing, can i offset the mortgage interest of both the flat and the house against what would only be a rental income from the flat?

If that is the case then leave it there. This level of financial dealings with a soon to be ex is just ludicrous.

Also I think you will find 'she is eligble' not we.