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  • Section 24 HQ

    S24 costs - off-set against capital gains?

    Hello everyone,

    Since they abolished the mortgage tax relief as a running cost for BTL sole traders, can this cost be counted as capital expenditure for potential future capital gain tax when a BTL property is sold?

    What others do think of this line of thought?

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    I'd be over the moon if that was the case but can't see it , I'd think its still a none allowed expense .

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    First of all Mortgage relief has not been abolished it is being restricted to basic rate tax relief and this is being gradually introduced from 2017-18 to 2019-20 when it will be fully implemented.  Accordingly for basic rate tax payers this may have no impact at all.  As for Capital Gains Tax relief - mortgage interest cannot be claimed as an expense for CGT purposes.

    Regards Nigel

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    Nigel Reynolds FCCA CMgr FCMI

    Property Tax Specialist

    Reynolds and Co

    http://www.reynoldsandco.co.uk


    Nigel - I would have thought that mortgage interest on empty properties being held for redevelopment prior to lettings (or indeed re-sale) would be allowed as a capital cost.

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    It is generally only normal to capitalise the interest charges in connection with a new constrution of a property or for an existing property which takes a substantial time to convert.  Where a property is already setup for its intended use or only requires a small amount of work e.g. converting a single residence to a HMO then it would not be normal to capitalise interest.  I would not expect to capitalise interest unless there is fairly major work involved. In addition where you capitalise the interest then under case law (Gallagher v Jones and Threlfall v Jones both 1993) the tax treatment follows the accounting treatment.  Accordingly you first of all have to comply with the requirements of FRS102 (even for sole traders and partnerships) which restricts the capitalisation of interest and this then ties you in to a set tax treatment.

    The original question however was asking whether the interest could be capitalised purely because of s24 coming into force plus it was suggested that interest was no longer deductible.  It was these points that I was addressing rather than the more complex issue of capitalising interest on a property development which is a completely different issue, for which I have briefly explained some of the issues above.

    Regards Nigel

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    Nigel Reynolds FCCA CMgr FCMI

    Property Tax Specialist

    Reynolds and Co

    http://www.reynoldsandco.co.uk


    One other point I omitted to make in my earlier reply is that where a property is being held for redevelopment prior to sale without it having been let then that is not a capital gain.  It is a trading activity (as a builder/property developer) which is subject to Income Tax or Corporation Tax depending upon the circumstance.  It is not a Capital Gain.

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    Nigel Reynolds FCCA CMgr FCMI

    Property Tax Specialist

    Reynolds and Co

    http://www.reynoldsandco.co.uk


    Nigel - both of your replies are well made and understood - thanks for taking the time to reply so thoroughly and clearly. Of use, I feel to any of us looking to develop and/or divest of some of our leveraged properties in response to s24. Regards JohnC

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    You are very welcome. Getting the correct advice is very important in every business venture but for property investors it can have a greater impact because the numbers are usually much higher than in most other businesses.

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    Nigel Reynolds FCCA CMgr FCMI

    Property Tax Specialist

    Reynolds and Co

    http://www.reynoldsandco.co.uk

    Thank you all for replying.

    I could have phrased my thought more accurately to reflect the current situation. I did not feel the need to state the details of S24. Angela got the spirit of the question. Nigel shared his wisdom.

    There might be a merit in trying to lobby the government to consider its position regarding the removal of 80% tax relief on mortgage interest cost. It is a significant cost that, in my opinion, should attract a relief.

    There might be resistance to do a U-turn but could be easier for them to agree counting this towards CGT. I have tagged RLA and NLA in a tweet to see what their think tanks take on it.


    Hopefully, they might realise the damage it is doing to the sector and do what Ireland did.

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    There is continuous pressure on the Government to change its position.  However I believe that they will change their psoition when Landlords have moved out of Social Housing completely and the cost of renting other housing has increased further.  It is these two factors which changed Political opinion in Ireland, Canada and Australia.  The later two Countries have completly reversed this policy which they started and Ireland is in the process of reversing it after one year.

    The housing issue isn't being caused by Landlords but by a complete mismanagement of the property and mortgage markets by Politicians.  Until they talk to the people who unerstand the property market, rather than their alleged advisers, they will not get it right.

    Well those are my pearls of wisdom for what they are worth.

    Regards Nigel

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    Nigel Reynolds FCCA CMgr FCMI

    Property Tax Specialist

    Reynolds and Co

    http://www.reynoldsandco.co.uk


    Very kind. Many thanks.

    I am guessing that some of the government figures are lanlords themselves. They could be applying pressure through outside organisations such as RICS etc.

    Interesting 2-5 yeas coming ahead.

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