Most tax-efficient option: living in rented or owned property in London? Most tax-efficient option: living in rented or owned property in London?
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  1. #1

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    Neo's Avatar
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    Default Most tax-efficient option: living in rented or owned property in London?

    I am an IT contractor working in London during the week and own two properties, one outside of London (Surrey) which is my current ‘home’ address, and also a property I purchased in March in London.

    I rent a property in London for the purpose of the business – of course, I can put this through the business as a tax-deductible expense. However, going forth, I am considering two options. Either:
    • Renting out my owned London property at around £1600 per month. The mortgage payments are £1204 per month, the interest currently being approximately £930 of this. I would then continue to rent (currently £1473 per month) claiming this as a business expense.
    • Living in my owned London property, in which case, is there anything I can put as an expense through the business such as the mortgage payments/interest if I am living there purely for business purposes as my home property is in Surrey? In other words, I would be paying the mortgage on both properties without any rental income from either because the Surrey property is my home base, and I am using the London property to live in during the week when working in London, effectively missing out on potential rental income. What financial breaks can I gain from this arrangement, and which would be more financially efficient – to have my Surrey or London property as my Principle Private Residence with HMRC?


    Based on the above two options, I would like to know which would be most financially efficient in terms of taxation.

    I can do the sums myself, but I'd just like to be pointed to what the rules might be in this slightly complicated couple of living arrangement options.

    Thanks!

  2. #2

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    Quote Originally Posted by Neo View Post
    Living in my owned London property, in which case, is there anything I can put as an expense through the business such as the mortgage payments/interest if I am living there purely for business purposes as my home property is in Surrey?
    Paying the mortgage through the Ltd Co will become a BIK so expect to pay $$$ on it. Unless you sell the flat to your company and rent it off yourself at market rate, though that's just a silly idea.

    Probably best to carry on the way your going.

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    Greg@CapitalCity's Avatar
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    I am struggling to see too much advantage either way if your London property has a market rental rate of about what you would spend to rent a different flat yourself. The only advantage I see in renting out your London flat, is that you then stay in the smallest cheapest place you can, and save some money that way.

    Principle Private Residence affects your capital gains position with both properties. You have not given us enough information to comment on that, and to be fair its probably a long discussion that you will want to have with your accountant.

    And of course, if you decide that you do actually 'live' in London, then you won't be able to claim for the cost of any London-based accommodation, since 'coming to London' ceases to be business travel.
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    How long have you been doing this? Have you thought about the 2 year rule?

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    Neo's Avatar
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    Thanks very much for the replies.

    Greg, the advantage I see of living in rented accommodation in London and keeping my Surrey property as my 'home', is that I can put this through the business as a tax-deductible expense, something I'm guessing I couldn't do with a mortgage payment without causing lots of BIK tax complications.

    As for my capital gains position with both properties and which I should have as my Principle Private Residence to get the best tax efficiency, what more information do you need? The Surrey property was purchased in 2003, has an oustanding mortgage on it of ~£105k, payments are £507 per month (1.25% APR). It's worth ~£150k. The outstanding mortgage on my London property is ~£224k, payment are £1204 per month (5.99% APR). It's worth ~£250k.

    I'm in discussion with my accountant about this, but I wanted to get a wider opinion as well on the forum.

    JamJarST - I've only been contracting for three months so far.

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    Quote Originally Posted by Neo View Post
    Thanks very much for the replies.

    Greg, the advantage I see of living in rented accommodation in London and keeping my Surrey property as my 'home', is that I can put this through the business as a tax-deductible expense, something I'm guessing I couldn't do with a mortgage payment without causing lots of BIK tax complications.

    As for my capital gains position with both properties and which I should have as my Principle Private Residence to get the best tax efficiency, what more information do you need? The Surrey property was purchased in 2003, has an oustanding mortgage on it of ~£105k, payments are £507 per month (1.25% APR). It's worth ~£150k. The outstanding mortgage on my London property is ~£224k, payment are £1204 per month (5.99% APR). It's worth ~£250k.

    I'm in discussion with my accountant about this, but I wanted to get a wider opinion as well on the forum.

    JamJarST - I've only been contracting for three months so far.
    With regard to the PPR exemption, you need to consider which property you're going to keep hold of, whether you're going to rent either of them out, and how much you'd gain on them if you sold them. There are some tax allowances in certain circumstances (for example when you rent it) that can make a difference to which one you chose as your PPR. You'd also need to go careful because if you try to claim your London residence as your PPR, but then you're renting somewhere else through the company in London too, HMRC would likely challenge the rental cost unless you could show the PPR is not commutable yet the rental property is.

    At the moment you're incurring extra rent so that you can put the rental cost through the limited company. But you're only really gaining the 20% CT relief on it. If you're then renting out your London home, it will incur personal tax at 20% on the rental income. Are you sure you're gaining anything when you look at the bigger picture? Or am I missing something....?

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    Thanks for the reply, Clare.

    I intend to keep hold of both properties indefinitely and just rent one or both of them out while contracting in London. These are the only bounds in which I wish to consider tax efficiency at present. Capital gains should I sell either of them off at a later date I will look at then, but that would be way off in the future, and certainly not within the current tax year.

    Like you said, claiming my London property as PPR and renting elsewhere in London would be a bad idea, so I would only consider setting it as PPR should I decide to live there and only if it is more financially beneficial than keeping my Surrey property as PPR.

    As mentioned earlier, if I continued to rent in London, I would rent my London property out at ~£1600 per month, therefore making ~£670 over the current mortgage interest per month, and ~£396 more than my monthly mortgage payment.

    My Surrey property I may also rent out on a flat share basis (resident landlord) if I keep it as PPR.

    I understand I have some allowance for rental income per year on my first home, though, is that right?

    No, you're not missing anything. I'm just trying to work out what I can do and what will result in the best net financial outcome based on whether I live in rented or owned accommodation in London, which property I have as PPR, and whether I rent out one or both properties dependent on my choice of where I decide to live myself.

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    Quote Originally Posted by Neo View Post
    Thanks for the reply, Clare.

    I intend to keep hold of both properties indefinitely and just rent one or both of them out while contracting in London. These are the only bounds in which I wish to consider tax efficiency at present. Capital gains should I sell either of them off at a later date I will look at then, but that would be way off in the future, and certainly not within the current tax year.

    Like you said, claiming my London property as PPR and renting elsewhere in London would be a bad idea, so I would only consider setting it as PPR should I decide to live there and only if it is more financially beneficial than keeping my Surrey property as PPR.

    As mentioned earlier, if I continued to rent in London, I would rent my London property out at ~£1600 per month, therefore making ~£670 over the current mortgage interest per month, and ~£396 more than my monthly mortgage payment.

    My Surrey property I may also rent out on a flat share basis (resident landlord) if I keep it as PPR.

    I understand I have some allowance for rental income per year on my first home, though, is that right?

    No, you're not missing anything. I'm just trying to work out what I can do and what will result in the best net financial outcome based on whether I live in rented or owned accommodation in London, which property I have as PPR, and whether I rent out one or both properties dependent on my choice of where I decide to live myself.
    You won't be able to claim the rent indefinately, look up the two year rule in the guides here for why not.

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    I didn't say I would be claiming the rent indefinitely. And even if I did, I fail to see why you feel the 2-year rule - which I'm aware of - applies here.
    Last edited by Neo; 28th May 2012 at 16:32.

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    Quote Originally Posted by Neo View Post
    I didn't say I would be claiming the rent indefinitely. And even if I did, I fail to see why you feel the 2-year rule - which I'm aware of - applies here.
    Good point, this isn't travel so wouldn't be an issue, ignore me I was having and brain dead moment

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