Many of those who bought reasonably affordable property before the sharp rise in the market find themselves in the role of landlord for the first time.
One Family Money reader Mr AB bought an apartment with his wife in 1996 for £46,000 (#58,408). The couple lived in the apartment until earlier this year when they had their first baby and bought a house for £175,000.
They decided to hold on to the apartment and now have a single mortgage for both properties. Mr AB's wife has left her job to care for the baby at home and the repayments on the larger mortgage are now £1,250.
Mr AB wants to know how to go about renting the apartment in the most tax-efficient way. He estimates its rental value at £900 per month. He is a self-assessed taxpayer with an annual income of £35,000.
The first point is that the couple will only be entitled to mortgage interest relief on the share of the mortgage that applies to their house. It is not allowable on the apartment and neither can the mortgage interest be offset against rental income.
There is a list of expenses deductible from the rental income. Any management fees for the apartment complex, waste or water charges are allowable.
If any utilities are included in the rent, those charges can also be offset against the income. Household insurance premiums are also deductible. Any expenses incurred by Mr AB for repairs and maintenance of the apartment, such as painting, or fixing or replacing any fittings, are allowable and it is important to keep receipts. Preletting expenditure, however, is not allowable.
If the apartment is furnished, there is a wear and tear allowance of 15 per cent per annum on the contents, as long as they were purchased since 1992. If the outlay on furniture, white goods and other fittings was £5,000, for example, that would produce an allowance of £750 per annum.
It might be worth putting the apartment into Mr AB's wife's name, as she has no income of her own at the moment. But there are several factors to bear in mind and calculations to be made before taking this step, including the possibility that she might return to paid employment.
The rental income of £7,800 per year for Mr AB's wife would mean the couple would not be entitled to a Home Carer's Allowance and his wife would have to pay PRSI of 3 per cent as well as tax of 20 per cent. With an income of £35,000, Mr AB would be paying the higher rate of 42 per cent.
Whatever they decide, one of them will be liable for capital gains tax (CGT) of 20 per cent on the sale of the apartment. The gain will be assessed as the difference between the price they paid for the apartment and the selling price, allowing for indexation.
Because the couple lived in the apartment for a time, not all of the gain will be liable for CGT. If they sold the apartment in five years' time, having lived there themselves for five years, CGT would be due on 50 per cent of the gain.
