Property and Tax Issues

Isis' Maggie Fleming answers readers questions in Saturday's Daily Telegraph newspaper for the Property Clinic section.

The questions and answers are reproduced for you here.

This page contains Questions & Answers from March 2007. Older articles are accessed through our Archives page.

There is a wealth of information on these pages. If you have a specific interest, please use our Search facility.

In 1993 I was sent on an assignment to central Europe by my company. I rented my flat to friends and thought I would be back by the end of the year. Fourteen years later, I am living in Hong Kong and have never returned to Britain.

Being young and thinking I would be gone a only a few months, I did no tax planning. As the years passed and I did not receive any tax forms, I did not make any tax returns.

A few years ago, I sought advice and was told that as my sole UK income was the rental from the flat (low because friends were looking after it for me) I had no tax liabilities.

With no return to the UK in sight, I am considering selling my flat. Given my non-resident status, what would be the tax implications?

Maggie Fleming writes:

How nice to be the bearer of glad tidings for a change. A person can only be liable to Capital Gains Tax (CGT) if they are resident or ordinarily resident in the UK. As you have been out of the UK for 14 years and will be non-resident when you sell the property, you will not be liable to CGT on the sale. You will need to take advice from your Hong Kong adviser as to your liability in that jurisdiction.

It used to be that people avoided CGT by leaving the country for a single tax year and selling a valuable asset - commonly their business - while they were away. In 1998, the Government realised that they were losing a considerable amount of revenue that way and introduced anti-avoidance legislation.

Now, under the temporary non-residence rules, you have to be abroad for five complete tax years to avoid a charge to CGT.

Quite separately, there is relief available to people who sell their home while they are resident but who may have spent some time working abroad. Provided that they occupied the property as their main residence both before and after the period spent working abroad (unless they cannot reoccupy the premises because their job requires that they work away from home again) and did not have another property qualifying for Principal Private Residence (PPR) exemption during the period of absence, the period of absence will qualify for relief.

I note that your rental income was low and that you did not need to complete annual tax returns. Where a person leaves to work abroad and rents out their property at a commercial rent, they should normally register with the Non-resident Landlords Scheme to enable them to receive the rents gross.

My wife and I are about to exchange contracts on a small terraced property which will be occupied by our daughter and her boyfriend. To fund the purchase, we have increased the mortgage on our main residence on an interest-only basis, and will charge rent to cover the interest. We have managed to get a good, five-year fixed rate so that our daughter and her partner know the rent will be stable and, in a few years, may be in a position to purchase the house from us.

I contacted the Inland Revenue and was advised that we could offset the interest on the increased amount of the mortgage against the rental income, and hence not pay any tax on it. I made it clear that the mortgage was on my main residence, and not on the new property.

However, I am now worried that I have been wrongly advised. We will have a real cash-flow problem if we cannot offset. We would have to put the new house in my wife's name to minimise tax on the rent, but this would mean that future Capital Gains Tax (CGT) would be greater, as we could use only one allowance.

Please put my mind at rest that we are allowed to offset even though the mortgage is not on the property being rented.

Maggie Fleming writes:

Your tax office is absolutely correct. You can deduct the interest on the part of the loan used to buy the property, provided that your rental business is being run on commercial terms. As it is being let to your daughter, you need to be careful that the expenses cannot be disallowed on the grounds that you are simply maintaining your family.

In order for the lettings to be treated as a business, you should charge a full market rent and have a normal lease in place. However, if the property is let at less than market rent, you should still be able to deduct expenses up to the amount of the rent each year - you will not be able to carry excess expenses over to a later year, however.

You are aware that you will have CGT to pay on sale. Do not forget that a future sale to your daughter will be deemed to take place at market value: i.e. you will not be able to transfer the property at a lower cost in order to save CGT.