Is capital gains tax a possibility?

Legacy_user

I'm not sure if this is the right forum so moderators feel free to move this query.


My father who is 71 recently underwent a serious operation and is now convalescing with his partner in her home. He thinks that his own house will be too much for him to maintain and is now pondering the consequences of either selling his house (currently worth about £200,000) and moving in with his partner or renting out the house. He currently has a small mortgage of £1000 on it which he was advised to keep when his original 25 year mortgage expired.

If he sells the house he can obviously invest the money but will lose any potential increase in value and this area regularly sees increases of approximately 10% each year. My question, or rather my father's question is this:

If he holds on to the property and rents it out will he have to complete a tax return and declare his income from it ie: will his partners house be classed as his main dwelling?

If he rents it out for a while and then decides to sell it later will he be liable for Capital Gains tax?

Finally are there any other potential problems he should be thinking about?

ctm_2

If he rents out the house, he will need to declare the income.

As to the capital gains aspect, I'm not sure if it could still be classed as his primary residence when selling after renting, as if he goes to live with someone else it will still be the only property he owns.

Best place for an ansewr and discussion of the various scenarios is to ring your tax office and make an appointment to see someone who knows the ins and outs of capital gains rules.

Ian_W

If he holds on to the property and rents it out will he have to complete a tax return and declare his income from it ie: will his partners house be classed as his main dwelling?

As ctm says he will have to declare the income and will pay tax on the profit [ie; income less expenditure like mort interest, agents fees, repairs etc]. Doing so won't make his partners home his main dwelling, he can opt with the IR that his current home remains his principal private residence [PPR].

If he rents it out for a while and then decides to sell it later will he be liable for Capital Gains tax?

I believe can sell up to 3yrs after the property ceased to be his PPR [see above] without risking CGT, although you may need to check that with the IR or an accountant. Any CGT will apply only to the gain in value from when the prop ceased to be his PPR [+3yrs?] to when he sells and he will have a personal allowance of £8.5k [current tax year] and may be able to claim taper relief, which will also reduce any liability.

Other things to consider? As he still has an outstanding mortgage [minimal though it is] he needs to inform his lenders as they may charge a fee or slightly higher interest as it's no longer a conventional residencial mortgage. Might be better paying it off! Same with his household insurers, who may also charge a bit more.

EDIT: Perhaps more importantly, how will he feel about "strangers", who may treat the property differently than he has, occupying his home? Renting is a business so research the area as to the call for the type of house he has, whether it's better furnished/unfurnished, likely rental etc, etc. Although he may miss out on property price rises if he sells renting out prop is not without its headaches and prop prices may well stay flat for the next few years.

Hope that helps.

pchelpman

What others have said here is virtually spot on. All good advice.

I won't comment too much on non-tax areas but the tax position is this.

Yes, he can let out the porperty, claim expenses of running the property (NOT expenses on bricks & mortar "alterations") then pay tax on the profits.

Unfortunately, this will definitely mean he will have to file a complete FULL self-assessment tax Return declaring ALL his income and tax. Including all pensions/tax, savings income, interest, dividends and so on.

Once any rental income has started the Revenue must be notified in 6 months (I would recommend as soon as it starts so you don't forget!).

As to the future, the "bonus" 3 years is right. Under current regulations he can leave the property and do what he likes with it for the next 3 years. The "principle, private residence exemption" extends for the three years beyond actual physical occupation of the propery.

NO "ELECTION" FOR THIS IS NECESSARY; IT IS AUTOMATIC.

This always presumes the property is nothing out of the ordinary....grounds of no more than one acre, no business property etc. etc.

FootNote: I have no idea why he was advised to retain a small mortgage. My view is get rid of it. Waste of money.

johnsmith_4

Pam17 wrote:

I'm not sure if this is the right forum so moderators feel free to move this query.


My father who is 71 recently underwent a serious operation and is now convalescing with his partner in her home. He thinks that his own house will be too much for him to maintain and is now pondering the consequences of either selling his house (currently worth about £200,000) and moving in with his partner or renting out the house. He currently has a small mortgage of £1000 on it which he was advised to keep when his original 25 year mortgage expired.

If he sells the house he can obviously invest the money but will lose any potential increase in value and this area regularly sees increases of approximately 10% each year. My question, or rather my father's question is this:

If he holds on to the property and rents it out will he have to complete a tax return and declare his income from it ie: will his partners house be classed as his main dwelling?

If he rents it out for a while and then decides to sell it later will he be liable for Capital Gains tax?

Finally are there any other potential problems he should be thinking about?

If I was 71 I would not want the hassle that comes with renting out my house, I would sell it and keep the money in the bank earning me 10k per year. I would be very surprised if you would earn more than that from rent on a 200k house. This would also make interitance tax planning easier.