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Hi, I have just spent 25k renovating a flat which I bought

Hi, I have just spent 25k...
Hi,

I have just spent 25k renovating a flat which I bought six months ago and my daughter will live there. I will also stay there occasionally but it will not be my primary residence. The flat was uninhabitable so the costs are for maintenance and repair. My daughter will pay something towards her keep (roughly a third of market rent). How do I avoid tax on this and can I use the money I have spent repairing the flat against future tax? If so, how long can I use this money to offest tax? Is there another way around this?

Best Wishes,
Paul
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Answered in 18 minutes by:
4/8/2013
Tony Tax
Tony Tax, Tax Consultant
Category: UK Tax
Satisfied Customers: 15,950
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
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Hi.

Since the flat is being let at a reduced rent to your daughter, you cannot treat the expenses in the same way as you would if they were incurred on a commercially let property. They can be deducted up to the level of the rent received but the excess cannot be carried forward. Take a look at the notes in PIM2220 here on the HMRC website.

Since the renovation expenditure was incurred prior to the letting, you would be better off adding it to the cost of the property so that it reduces your capital gain if and when you sell it.

I hope this helps but let me know if you have any further questions.
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Customer reply replied 4 years ago

Thanks for this, I have had a look at PIM2220 and I'm interested in the pararaph:


 


"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."


 


How do I ensure that it does not produce a profit, IE what can I do about this besides offsetting against maintenance/repair costs?


 


Best,


Paul

If the flat is fully furnished at your expense, you can claim an annual wear and tear allowance which is 10% of the rental income regardless of whether you replace any furnishings or not.

A list of the types of expenses you can claim can be found here.

If you are married and your spouse does not have any income or her income is less than the personal allowance you night consider putting the property in her name to reduce any tax exposure.

The only other way of ensuring that you don't have a taxable profit is to either not charge any rent or charge a much lower amount than you are intending to which will always be covered by expenses.
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Customer reply replied 4 years ago

Thanks for that answer.


One more issue I would like you to deal with.


I am thinking of creating a trust with myself and wife as trustees, into which all the rental income will be placed for the children (or ourselves if we need to) to use at a later date.


Can you tell me how this could operate for our benefit and if this would be tax efficient.


 


Best,


Paul

Can you tell me what ages your children are please. How would the income be used and when? How much income will be generated from rents? Isd there a mortgage on the property?
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Customer reply replied 4 years ago

Hi,


 


I have three children all in their twenties (20/23/26). Income generated from rent will be about 6-7k per annum before deductions. There is no mortgage on the property, I bought it with cash left to me by my late mother.


The income would be used at a later date (unless there is an emergency) at least 5-10 years hence. I don't want it to be a gift to the children because myself or partner may need it. We need to be able to control the money.


 


 


Best,


Paul


 

Thanks.

Leave this with me and I'll get back you later.
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Hi again.

Trust tax is a complex area and your original question was about letting a property to your daughter so strictly, it should have been posted as a separate question but I;ll deal with it here.

I'm not sure how you think you will benefit by setting up a trust and I can tell you that the tax advantages they used to afford are largely gone. Take a look here for more information on trusts to get an idea of their complexity.

You would need to gift the property into a trust. This will be a chargeable lifetime transfer which will eat into your nil-rate Inheritance Tax band of £325,000. If the property is worth more than that, you will have an immediate charge to Inheritance Tax at 20% of the excess over £325,000. The gift would also be a disposal for Capital Gains Tax purposes and in order to avoid a charge to CGT on any gain if there was one, you would need to make a holdover election which you can read about here.

The trust would need to have an annual trust tax return completed and submitted to the tax office. The level of tax the trust would have to pay would depend on what type of trust it was. Take a look here for more information on that.

If you set up a trust of which you are the "settlor" and also a beneficiary, you will be taxed on all the income received by the trust even of it is not paid out to you unless the assets and funds held in the trust are allocated to specific beneficiaries. Take a look here for information on settlor interested trusts. There could also be Inheritance Tax charges at 6% of the value of the trust assets at each ten year anniversary and an exit charge when the trust comes to an end. You can read about those here.

Given the level of income that the trust will produce, the work, time and professional costs that will be required to maintain it and the tax implications, if I were you I would not put the property into a trust. You might consider consulting a trust specialist for a more detailed appraisal of your situation as I can only give you a few pointers here.
Tony Tax
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Customer reply replied 4 years ago


Thanks for this.


 


Best,


Paul

Thanks.
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