January questions and answers

Q. I have recently bought a residential property to rent out. To enable me to purchase this property I took out a mortgage on my own home, but I did use all the money to buy the rental property. Can I claim tax relief for mortgage interest against my rental income?

A. You should be aware that the rules for residential landlords claiming tax relief on interest paid changed from April 2017. The answer to your question is, yes, you can offset the interest you are paying on this mortgage against the rental income you are receiving from the purchased property. The HMRC Business Income Manual (at BIM45685) confirms that ‘the security for borrowed funds does not determine the use of those funds’. The new rules which came into effect on 6 April 2017 do, however, restrict the quantum of relief which can be claimed.  The restrictions are being phased in over a 4 year period such that with effect from 6 April 2020 only (a maximum of) basic rate tax relief will be available with regard to mortgage interest on rental properties.

Q. I am an IT consultant and I provide my services via my limited company, which operates outside the IR35 rules. I started working on my current contract just over two years ago – although when I started, I did not know that it would last this long. Do the temporary work place rules on allowable expenses apply in this situation?

A. There are a number of circumstances where, even though an employee attends a workplace to perform a task of limited duration or for some other temporary purpose, it will still be treated as a permanent workplace. This will be the case where the 24-month or fixed term appointment rules apply or where the workplace is a depot or base.

The 24-month rule prevents a workplace being a temporary workplace where an employee attends it in the course of a period of continuous work which lasts, or is likely to last, more than 24 months.

HMRC’s guidance on employee travel (Booklet 490) states (at section 3.21):

‘Where it is expected that the employee will attend a workplace to perform a task of limited duration or for some other temporary purpose for a period of less than 24 months, the workplace will be a temporary workplace from the outset.

However, if at a later date circumstances change and the employee is required to attend the workplace for a period that extends beyond 24 months, it will cease being a temporary workplace from the date that the expectation changed.’

Q. How is an estate valued for inheritance tax purposes?

A. Inheritance tax on death will be calculated on the net value of the estate. The net value of an estate is effectively assets less liabilities.

Examples of assets include, land and property, shares and securities, savings, jewellery, paintings and antiques. Assets within an estate on death will also include any assets gifted within 7 years of death.

Liabilities include, credit card debts, loans, overpayments of pensions, outstanding utility bills. The estate will also be reduced by reasonable funeral costs and any income tax or capital gains tax.

An estate will take into account all assets and liabilities of a person. In order for the debt or liability to be an allowable deduction from the estate, it must be owed by the deceased at the date of death. There must be a genuine commercial reason for the liability and if included within the estate, it must actually be a liability that is repaid from the estate.

Liabilities will be paid either out of the estates available cash or can be via the sale of an asset or by the personal representatives taking out a loan.

In addition, the value of the estate subject to inheritance tax will be reduced by any reliefs which may be due, for example business property relief or agricultural property relief and there may be other assets which are excluded from charge (for example many pension pots).

The taxable value of the estate will also be reduced by any nil rate band or main residence nil rate band which is available in respect of the deceased or a spouse who has already died.