In the current housing market, many people want to buy a new home but are unable to sell their old one at the right price. If they decide to let the old property out, they have joined the growing band of “accidental landlords”.

Interest on Loans

You cannot claim tax relief for the interest on a loan to buy a property you live in, but once you let it out, the interest becomes an allowable deduction from the rent you receive.

 If there is any equity in the property at the time you start to let it, then if you are able to release that equity by remortgaging the property, all the interest can be deducted from the rent you receive.

It does not matter what you use this released equity for – you might use it as a deposit on your new home, for example, or even, if there is enough equity available, to fund the entire purchase of the new property. As long as the amount of the mortgage on the old property is not greater than its market value at the point where you let it for the first time, all the interest can be deducted from the rental income for tax purposes.

Capital Gains Tax (CGT)

A gain on the sale of your “only or main residence” (OMR) is exempt from CGT, provided the property has been your OMR throughout the time you have owned it. If, however, you have let the property at some stage, some part of the gain will not qualify for the OMR exemption.

The gain is worked out on a time basis over the whole period of ownership since 1982. If you buy the property in September 1999 for £100,000, and sell it in September 2009 for £250,000, then the gain of £150,000 is deemed to have arisen at a rate of £15,000 per year. If the property was only your main residence from 9/99 to 9/04, then half the gain (from 9/04 to 9/09) will be chargeable.

There are two important reliefs available, however:

·         If the property has ever been your OMR, then it is always deemed to be your OMR for the last three years of ownership. In our example, therefore, the period from September 2006 to September 2009 will also be exempt, leaving only the period from September 2004 to September 2006 chargeable to CGT

·         If the property has been let as “residential accommodation” during the period when it was not your OMR, there is a further reduction in the chargeable gain. This is the lower of:

1.       The gain that is exempt as your OMR – 8 times £15,000 = £120,000 in this example

2.       The gain that is chargeable due to the letting - £30,000 in this case

3.       £40,000 per owner of the property

In this example, therefore, the chargeable gain of £30,000 is wholly covered by the “letting exemption” and there is no CGT to pay.

In many cases, therefore, whatever the market conditions, it can make good sense from a tax point of view to embrace your status as an “accidental landlord”!

James Bailey