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When someone inherits an unencumbered property and decides to let it out, they should look at transferring any borrowings secured against their principle private residence to the rental property.

If they have no mortgage on the rental property they will be subject to income tax on the rental profit but the mortgage on their home receives no tax relief, so they should switch the loan over to the inherited property and ideally keep their home mortgage free.

Relief for interest on loans on rental properties is allowed up to the market value of the property when it is first let.

If, for instance, an individual inherits a property and their own residence is also mortgage free they can still mortgage the rental property up to the market value and then use these funds for any purpose and still obtain full relief for the interest in the rental accounts.

Similarly, when letting a prior residence due to relocating or being unable to sell the property, the amount of interest that can be relieved against the rental income can be up to the market value of the property when it is first let, not the original cost of the property when acquired.

When looking at the capital gains tax position on rental properties it is important to review whether a property has been the individual’s main residence, as principal private residence relief and lettings relief can significantly reduce or even wipe out the capital gain on the property.

Principal private residence relief will apply to the period the property was occupied for as the individual’s main residence, but also for other certain periods of absence – for example, the last three years of ownership.

If a property is sold three years after it ceases to be the main residence, the entire capital gain will be covered by principal private residence relief.

Lettings relief applies only if the property was the individual’s main residence at some point during the period of ownership. This will reduce the chargeable gain by up to £40,000 an individual – for example, up to £80,000 if property is in joint names – but the amount of lettings relief cannot be more than the amount of principal private residence relief.

One area of concern for property investors is in respect of withdrawing equity on the property portfolio.

Many investors are now carrying on rental businesses full time with no other sources of income and they substantiate their living expenses by continually remortgaging the rental properties.

The funds released by remortgaging are not themselves taxable but consideration needs to be given as to whether full relief can be claimed on the interest on the borrowings on the properties.

When building a property portfolio it is common practice to remortgage your properties as they increase in value to put down deposits on new rental properties.

In this situation all interest on loans will be allowable. When you inherit a property, let out a prior residence or use equity in your own home as your initial seed capital, you are introducing funds into your rental business.

When your rental property increases in value you can withdraw your seed capital and still obtain full relief for the interest on your buy-to-let mortgages.

However, once you have had your seed capital back, if you continue to use the equity for personal expenditure then a proportion of the interest on your borrowings will need to be disallowed.

If this situation continues then this proportion keeps building, and quite often I see new clients that have been investors for many years and they or their previous accountant have given no

consideration to disallowing any interest on the borrowings in the rental accounts.

The personal tax returns show no other income, with rental losses building each year, which can increase your chance of investigation by the tax office.

In terms of exit strategies, it depends on your financial position when you are looking to retire. If you are looking to dispose of the properties it would be wise to sell one a year, to make use of the capital gains tax annual exemption.

If the property is in a sole name you could look at transferring this into joint names, where husband and wife, to make use of two annual exemptions although I would not advise doing this immediately before sale as the tax office will query this if the transfer is close to the date of disposal.

If you are looking to retire abroad, you could become non-resident in the UK and then sell your properties after the 5 April of the tax year that you departed the UK. Under the five year rule as long as you remain non-resident for five complete tax years, then any properties disposed of within the five years will not be liable to UK capital gains tax.

You may however be liable in the country in which you take up residency, so you need to take advice beforehand but if for instance you became resident in Dubai there would be no CGT liability.

If you returned to the UK before the five complete tax years have passed, you will be liable for CGT on all disposals made from the date of departure and this would be assessed in the year of return to the UK.

Donna McCreadie, chartered accountant at Perry's Chartered Accountants