Can my son get tax relief if he rents out his flat?

27 June 2013


Ten years ago, with the aid of a mortgage, my son bought a flat in which he still lives.He has now found a house that he wants to buy and live in (with the help of another mortgage) and he wants to let out his flat and remortgage it to provide further capital towards the purchase of the house.Will he be able to claim tax relief on the mortgage interest payments (in respect of the flat) against the rental income?
WT, Surrey


I believe he will get full tax relief as long as the property is not let to family members. The capital gains tax effectively crystallises (under main residence relief) at the time it becomes a commercial interest, so ensure some "high" valuations are sought. This may be difficult as he will need a new mortgage valuation to borrow the additional funds.

The new mortgage borrowing for personal use will need to be done before entering into a new mortgage, otherwise the loan-to-value and interest rates will be higher.

He must also check if his current lender will allow him to rent, as some either will not or will switch the mortgage to a buy-to-let (BTL) basis, which might mean higher interest rates. If permission is not sought, the mortgage lender could potentially foreclose on the mortgage.

When you purchase a BTL property…

As well as paying stamp duty (on all properties over £125,000), you'll also have to pay income tax on rent you receive through a tax return. How much you'll pay depends on your tax band (20% for basic-rate payers, 40% for higher-rate and 50% for additional-rate). But you can deduct certain "allowable expenses" from your taxable rental income, including:

  • Letting agency fees
  • Mortgage interest
  • Maintenance costs
  • Buildings and contents insurance premiums
  • Council tax and utility bills (only if you pay these)
  • Accountancy fees

Capital gains tax is also levied on BTL property if sold for more than it was bought for - although there is an annual tax-free allowance of £10,600. BTL properties will also count towards your estate for inheritance tax (IHT) purposes. IHT on estates worth more than £325,000 (or £650,000 for married couples or civil partners) is charged at 40% on everything above the threshold.