Late registration for tax on main home becoming a rental property also CGT query.

[Abigail]

Hello, wondered if anyone can help?

I bought my property in 2003 as my first and only home. In 2005 I moved out and let the property to 'friends of friends' as I wasn't sure if I would be returning a year later or if we would be able to keep it, in part, as a second home. At the time I also released £30,000 equity and bought a second joint property with my partner.

Because I made a loss between Dec 05 - April 06 (4months) and gained only about £400 between April 06 - April 07,(the interest only mortgage in itself is £600 per calender month, the rental income only £175 above this, at £775 a month, less 10% wear and tear, insurances, services, maintainece etc), so I have yet to register as a business for a £400 income in 2 years - but now having looked at the Land and Property pages on the Inland Revenue site, I realise that I should have done within three months of starting the business regardless!

I am keen to register now but will I be fined more than my £400 profit for lateness? I would like to file a return for this January - am I too late? I have decided not to move back to the property myself this year and am about to now let it to some 'non-friend' tenants and need to get proper tenancies and deposits in place. Am I therefore better to start accounting officially from this new date and just add the £400 profit for the earlier years in here?

Sorry this is about such a small amount of income but the princicples are the same and I would like to get it right!

Finally regarding CGT. Am I right in understanding that for the three years following my departure from the property in Dec 2005 it is not liable for CGT if I sell within three years? If I keep it beyond this period, which I intend to, when do I need to know its market value, what is the best way, as I don't want to pay CGT on my initial investment as my main home when originally purchased in 2003?

Any relevant advice welcome please!

Many thanks

Abigail

[plym77]

Hi Abigail

Strictly speaking you should prepare tax returns for the periods you have missed. You are supposed to register by 6 October following the year in which you started renting, ie. 6 October 2006.

The three month time limited is for the self-employed, you are a property landlord.

With regard to penalties, strictly speaking there could be penalties for late tax returns, but they are limited to the tax anyway, so assuming you do not owe tax for anything else, the fact that you made a loss in 05/6 should mean any penalty is reduced to zero.

The loss you incurred will then be carried forward against your rental profits for 2006/7 and 2006/7 must be filed by 31 January 2008 to avoid penalty. *see belowe re peppercorn rents.

... So you should be fine re penalties.

Re CGT, yes, broadly, you have 3 years following departure for 'deemed PPR' and therefore sale within 3 years would be exempt. However past that point you will be entitled to lettings relief on the basis that you have let a property that has also been your PPR - this is assuming you do rent it out and not merely let friends stay there for free for example! Lettings relief can be worth up to £40k, depending on the figures (but not merely a total of £40k, the circumstances will determin how much is available), and if two owners £40k each - so consider involving a spouse before sale (but watch implications - get the figures checked).

Finally, there are other planning mechanisms available to prolong CGT reliefs should you require advice in the future.

On another point - consider whether you have your mortgages structured efficiently to ensure you are getting maximum interest relief. The key value of the property for you would be in 2005 when it became a Buy to Let, so if you have more than one mortgage, try and look at the structure to ensure that you are maximising interest relief against your rental business.

One final point. If you are only receiving a 'peppercorn rent' then remember that the losses you may incur on this property are ringfenced - you cannot set the losses against other commercial rental profits.

Hope this helps

Regards

Sherena Glanton

Chartered Tax Adviser