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TonyTax
TonyTax, Tax Consultant
Category: Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I own (with a mortgage) a cottage which I have rented out for

Resolved Question:

I own (with a mortgage) a cottage which I have rented out for approx. 15 months since moving to my now main residence. This tenancy is due to finish within the month.
The value of the property is approx. £115k and there is a £50k mortgage.
I have owned the property since 2000 and it has had significant work undertaken whilst it was my main residence (Nov 2011) and further work for the rental market.
If I sell the property, will I fall in the !8% tax band on such a limited profit?
If I continue to rent out, and pay the mortgage with the rent & set money aside for further work, what if any income tax will I be liable to pay from the income from this property ( I am currently earning about £20k/annum)
Submitted: 3 years ago.
Category: Tax
Expert:  TonyTax replied 3 years ago.
Hi.

The mortgage has nothing to do with the calculation of the gain on the property I'm afraid. How much did the property cost to buy? What was the cost of the improvements (not regular maintenance and upkeep costs)?
Expert:  TonyTax replied 3 years ago.
I have to go out for a while but I will be back to give you an answer once you have provided the information I asked for.
Customer: replied 3 years ago.

The initial cost was £42k in 2000 and improvement since in the region of £30k overall. It was my primary home until Nov 2011, and was subsequently rented out wef October 2012

Expert:  TonyTax replied 3 years ago.

Thanks.

Can you tell me which month in 2000 you bought the property please? What is the monthly rent? What are the regular expenses, eg letting agent fees, insurances, etc?

Customer: replied 3 years ago.


the property was bought in January 2000.


letting fees are 10% of the rent (£420-450/mth) and insurance £20/mth.


 


The next expense would be central heating & improved plumbing £5k


Maybe damp proofing up to £1k.


 


between now +next tenant/sale outside work up to £1k.

Expert:  TonyTax replied 3 years ago.
Thanks.

If you sell the property in June 2014 for £115,000 you will make a gain of £43,000 (£115,000 - £42,000 - £30,000). By that time you will have owned it for 174 months of which you will have lived in it for 143, let it for 19 and it will have been vacant for 12.

The gain for the period the property was your main home will be exempt from CGT as will the gain for the last 18 months of ownership. That accounts for £39,787 (£43,000 / 174 x 161). The remaining gain of £3,212 is split between the letting period (£741) and the vacant period (£2,471).

As the property will have been both your main home let you will entitled to letting relief which will be the lesser of:

1 £40,000,

2 the sum of the main residence gain and the gain for the last 18 months of ownership of the property which is £39,788 and

3 the letting period gain of £741.

Letting relief of £741 will reduce the remaining gain of £3,212 to £2,471 and the annual CGT exemption of £11,000 will cover that so you should have no CGT to pay.

The tax office may ask to see proof of the improvement work in the form of receipts and invoices. Even if all of the £30,000 was disallowed because of the lack of proof, you would still have no CGT to pay.

If the property is let unfurnished and your gross rents are £5,400 per annum and you pay letting fees of £648 per annum and insurance of £240 per annum, you would have a profit before repairs of £4,512. Tax at 20% would be £902.40. The tax office may argue that £5,000 spent on central heating and plumbing amounts to an improvement which you should add to the cost of the property as opposed to deducting it from the rental income as repairs and maintenance expenditure.

I hope this helps but let me know if you have any further questions.
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