From: "Ben" 
Newsgroups: uk.finance
Subject: Re: Letting a flat.. feasabilty study??
Date: Mon, 14 Nov 2005 18:53:49 +0000 (UTC)


"Ronald Raygun"  wrote in message
news:Mc0ef.7710$Lw5.5605@text.news.blueyonder.co.uk...
> Ben wrote:
>
>> We live in a flat which is in a block of 28. It is in Scotland and is
>> freehold but does not have a Factor looking after the maintenance of it
>> so
>> it has gone downhill. We want to move to another area but repair work
>> needs to be done to the block.
>> As owners/absentee landlords did not reach agreement for the work to be
>> done the local council issued a statutory notice and will get the work
>> done and bill the owners for it. This has been outstanding for over a
>> year
>> and it seems that the work will not be done for another nine months.
>
> This is not untypical.

Seems that Councils want owners to do urgent repairs within 28 days but when
no agreement is reached it takes them two years to do it:-)

>
>> The
>> last person to sell in October of last year had £6K retained from the
>> sale
>> price (£90K) for the as yet unknown cost of the repair.
>> I feel that the outstanding and as yet only partly specified work will be
>> off putting to prospective buyers.
>
> You may be right, you may be wrong.  The fact that the cost of the
> repairs will be borne by the sellers rather than the buyers will partly
> mitigate, i.e. they will only be put off by the prospect of their block
> being turned into a building site for a few months at some time in the
> future (which after all is something which can statistically happen to
> anyone anywhere anytime), but not having to pay for it will make it
> feel less bad.
>
Some owners are now thinking that other non essential improvements could be
carried out at the same time. I would not want the cost of them lumped on to
me.

>> Although the flats are in a good area,
>> are spacious and have great storage
>> space they never sell for what owners feel that they are worth. Estate
>> agents say that is because they are ex council.
>
> No, it's just because owners feel they are worth more than they are.
>
They are much better than the flimsy new flats being put up around the
country. In (£153K) one we looked at:  the small double bed had been put at 
an angle
to give enough room to walk round it. When I commented that the dining area
looked much bigger in the brochure I was told that they use specially made
scaled down furniture for the photographs.

>> I am considering buying the new house from our capital although that
>> would
>> mean taking some money from our PEP's and renting the flat out until the
>> work is completed. We would get about £500 a month for it which I reason
>> is more than we would get in interest from the same sum.
>
> How confident are you that you can find a tenant more or less straight
> away?

There are about ten in the block that are rented out and none are ever
vacant for long. We were renting this one out 11/14 years ago and never had
a problem.
>
>> It could be that it renting
>> it out on a long term basis might be a good investment. If I rent it out
>> for just a year and then sell it would CGT tax be involved as it had not
>> been our residence
>
> But it *has* been your residence.  Under current rules the last three
> years
> of ownership are given the same treatment as owner-occupation (provided
> the owners did in fact occupy the house as their main home during some
> part of their ownership).  So even if you rent it out for (almost) three
> years and then sell, no CGT will be due.

That sounds good.
>
>> (assuming that house prices go up in the next year).
>
> It makes no difference what prices do in the next year.  Where there is a
> change of status from principal residence to rented-out or unoccupied or
> second-home, no account is taken of notional value at the time.  The only
> values involved for CGT purposes are the actual purchase price and the
> actual selling price.

The actual purchase was many years ago. Amusing story when I first rented it
out and declared the rent on my tax return. The I.R. wrote and asked when I
had bought the property and how much had I paid for it. I told them and they
then asked where I had got the money from. I reminded them that they had
taxed me on the profit from a company share option scheme and that the
amount I had been left with was the exact amount of the purchase price, Ya
Boo Mr Tax Man:-)

>
> These prices are adjusted for acquisition and disposal expenses and for
> indexation (up to 4/98).  This gives a gain.  This gain is then spread
> linearly over the whole period of ownership.  Those parts of the gain
> which correspond to periods of PPR-status (Principal Private Residence)
> are eligible for PRR (Private Residence Relief).  The last 3 years
> always qualify unless there has never been PPR status.  Of the rest,
> Lettings Relief is available for periods when the property has been
> rented out.  LR is capped at the value of PRR and £40k, whichever is
> lower, so you could in fact rent it out for quite a few years before
> any CGT became actually due.
>
> So if you've lived in the place for 15 years, then rented it out for 15
> more years before selling, then 18/30 of the gain (corresponding to the
> first 15 and the last 3 years) qualifies for PRR, and potentially all
> of the remaining 12/30 of the gain is eligible for LR (provided the
> indexed gain does not exceed £100k (being 30/12 of £40k)).

The gain will never exceed that!

>
> Even if some taxable gain remains, there's still Taper Relief to come
> off, and of course your annual CGT exempt amount (for each of you if
> the property is jointly owned).

Actually it is my name only,  might it be better to alter that or would it
be regarded as a tax fiddle?

>
>> Over the longer term CGT would obviously be involved.
>> A second, madcap idea occurs to me, would it be feasible? For my wife and
>> I to form a company and sell the flat to it prior to renting it out. We
>> could then have the company install double glazing and pay for the
>> eventual statutory repairs from the rental income. We are both non tax
>> paying Senior Citizens, the ready cash in our bank accounts is at a level
>> where we can claim Gross Interest and all the rest is in TESSA's PEP's
>> and
>> ISA's Andy.
>
> This is indeed a madcap idea.  It is in principle perfectly feasible,
> but what would be the advantage, in your opinion, of owning the company
> which owns the property, instead of just continuing to own the property
> directly?

The thought  was that a company could claim back VAT expenses
associated with the property and have "other"  expenses.

>
> The statutory repairs need to be paid by the sellers (you), not the
> company.  You'd be throwing away rights to any future CGT relief.
>
> To the extent that the double glazing installation is a repair, you can
> set its cost against rental income anyway, only the excess which counts
> as an improvement would be disallowable against income (but allowable
> against capital gain in due course).
>
I think that double glasing would be an improvement rather than a repair and
it would have to happen before the tenant moved in.

> If you continue to own the property personally, you can set the statutory
> repairs against rental income anyway.  This will probably create a
> whopping
> loss in the year you have to pay for them, much of which you can carry
> forward to set against future income.

That is the idea, I thought that it would apply more to a company rather
than individuals

>
> If you spend all your savings (at least those which would earn taxable
> interest) on buying your new home, you will lose that source of income,
> so even if there is residual income from the rental, at £500 a month
> that's only £3k a year each, which is not going to make you taxpayers
> if you haven't been before (but you don't say how much potentially
> taxable pension income you have, so you may end up paying *some* tax,
> but not much).

£500 a month is £6K a year. We can live on our pensions which are well under
the tax limit but several holidays a year come from savings.
Andy