Letting a flat.. feasabilty study??

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. 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. 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. 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. 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 (assuming that house prices go up in the next year). 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.

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. 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. 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. 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. 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 be involved as it had not been our residence (assuming that house prices go up in the next year). 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 not untypical.

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.

No, it's just because owners feel they are worth more than they are.

How confident are you that you can find a tenant more or less straight away?

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.

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.

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)).

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).

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 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).

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.

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).

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:-)

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.

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.

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.

That sounds good.

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:-)

The gain will never exceed that!

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

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

I think that double glasing would be an improvement rather than a repair and it would have to happen before the tenant moved in.

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

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

That's one of the few tax "fiddles" which are actually allowed and OK. You can transfer half the property to your wife and for CGT purposes this will count as her having acquired her half at the same time as you.

The company would have to make VAT-able supplies to be able to claim back expenses. But there is no VAT on residential letting, so that idea is out. And even if there were, you wouldn't need a company. You could be personally VAT-registered.

If it "needs done", there must be something sufficiently wrong with the existing windows, to deem them in need of repair or replacement. How much would it cost to replace them with something equivalent to what there is now? How much more than that will the double glazing cost? The difference is improvement, the rest can be set against income as repair. If you can not get equivalent replacements for less than the cost of double glazing, you can count the whole cost as as a repair.

Why did you think that? You don't need company wrappers around simple businesses.

£6k a year is £3k a year each, because there are two of you, provided you put the property in joint names.

The question is, though, whether your pension *plus* £3k is still under your tax limit. You won't have much in the way of savings left once you buy another property, though, will you? Bye bye holidays?

It needs doing as the original windows are Crittal metal framed and cause great pools from condensation at this time of year.

From what I remember from letting it previously I had two choices, one of

10% of the rental for repair/replacements or to have the actual cost used for tax purposes. I remember that we were not allowed to charge for our own time when we had to completely redecorate after letting it to wild nurses.

O.K.

We can take the money out of ISA's etc.but once the building work is finished we could sell the Flat and we could get a Lifetime mortgage of 30% on the new property in we wanted to. Ben

The 10% wear and tear allowance only applies to properties which are rented furnished. This -as you would expect- covers notional expenses for the maintenance, repair, and replacement of *furniture* and other movable contents. Other repairs, to the fabric of the building and to fixtures and fittings, would still be allowable on an actual cost basis, and windows would fall into that category, so you could count those *even if* you operated the 10% WTA for a furnished rental.

That's true, and if you think about it, that's quite sensible. Suppose you had employed a professional decorator, then you would have been able to set the cost against your rental income, but the decorator would have had to pay tax and NI on the money you paid him. Now substitute yourself for the professional, and you'll see that you'd end up both paying and saving income tax on the money you would be paying yourself.