Capital Gains Tax

WLM21

I own a house, on a mortgage, with the last payment due this month, with a value of about £200,000. The house was recently extended and totally ‘fixed up’, new wiring, new plumbing and plastered throughout. It’s location would make renting out very easy.

My father owned a house, fully paid for, valued at about £230,000. It needs a fair bit of work though to bring it up to scratch, but it is much bigger than my house.

My father has just died and I will be left his house.

What are the tax implications, if I retain my own house, rent it out and move into my father’s house ?

What other options are available, to minimise tax ?

I have lived in my house for a long time, so would be reluctant to sell it.


thanks

getmore4less

You get taxed on the profit from the rent.




think about it carefully

Do you want/need 2 houses for ever?
Do you want to start a rental business as a landlord.

WLM21

getmore4less wrote: »

You get taxed on the profit from the rent.

Do you want/need 2 houses for ever?

Do you want to start a rental business as a landlord.

Currently I am self-employed, but as my wife and I cared for my father, my financial situation is not as good as I would have hoped.

However, I actually did rent my house house, while i worked overseas quite a few years ago, and was quite happy that, at the time the rental was way over my mortgage. That was for about 5 years in total

If I rent the house out now, the income, even after tax would help us very much.

jamesd

The capital gains tax base value for the property you let is the value it had when you transferred it into your letting business. You will get relief on all gains until then because it was your primary residence. Letting relief may apply for gains after that. Rental income would be normal taxable income for you and you would have to complete a tax return every year and be part of the SA tax system.

You could take a mortgage against either property to limit the amount of capital that you're transferring into the letting business to something less than the full value of the property. Mortgage interest for the purpose of acquiring the asset for the lettings business is deductible from income. Best to take professional advice on this because different ways of structuring things can affect the eligibility for deductions, notably the purpose of the mortgage.

Since you didn't transfer the full value into the letting business the capital that you have left - provided by the mortgage - would be available for refurbishing the inherited property. Since this is likely to increase the value it is likely that making a principal private residence declaration for this property is best. A PPR declaration is required when there are two homes that could be considered your residence and I'm assuming that for a short time either could be because you would split your time between each.

antrobus

jamesd wrote: »

The capital gains tax base value for the property you let is the value it had when you transferred it into your letting business. You will get relief on all gains until then because it was your primary residence. Letting relief may apply for gains after that.

No, that's not the way CGT works.

The capital gains tax base value will be what the OP paid for it, plus any sums expended on capital improvements.

What happens when and if the property is eventually sold is that any gain will be time apportioned between a) the period it was the OP's primary residence and b) the period it was a business asset, taking into account the fact that the last three years are always tax free.

Lettings relief will however apply, and you get an annual CGT allowance as well.

jamesd wrote: »

Rental income would be normal taxable income for you and you would have to complete a tax return every year and be part of the SA tax system.

That bit's right.

jamesd wrote: »

You could take a mortgage against either property to limit the amount of capital that you're transferring into the letting business to something less than the full value of the property.

Taking out a mortgage against the property that is being rented out will limit the amount of capital that you're transferring into the letting business. Taking out a mortgage against any other property won't.

jamesd wrote: »

Mortgage interest for the purpose of acquiring the asset for the lettings business is deductible from income. Best to take professional advice on this because different ways of structuring things can affect the eligibility for deductions, notably the purpose of the mortgage.

This is where the market value of the property at the time you transfer it into the letting business does matter. As you can always get tax relief on the interest paid on a mortgage that is up to this valuation figure.

jamesd wrote: »

Since you didn't transfer the full value into the letting business the capital that you have left - provided by the mortgage - would be available for refurbishing the inherited property. Since this is likely to increase the value it is likely that making a principal private residence declaration for this property is best.

A PPR declaration is required when there are two homes that could be considered your residence and I'm assuming that for a short time either could be because you would split your time between each.

A PPR declaration is never 'required'. A taxpayer has the option of choosing which of any number of the properties they own is their principal residence so long as they actually live in them. Since the OP's intention is to rent out one property this doesn't apply. (You can't PPR a property that is let out.)

antrobus

WLM21 wrote: »

What are the tax implications, if I retain my own house, rent it out and move into my father’s house ?

The tax implications are

(a) As has been stated, you will pay income tax on the profit you make on the rental income.

(b) There will be a potential liability for Capital Gains Tax when and if you come to sell the house you've rented out.

WLM21 wrote: »

What other options are available, to minimise tax ?

Given that you say that your father's house "needs a fair bit of work though to bring it up to scratch" you may be thinking in terms of borrowing some money to fund those improvements. In which case, it would make sense to borrow that money on the security of your current home that you will be renting out, rather than on the home you actually intend living in and will be spending the money on. That way you can at least get tax relief on the interest.

P.S. If you're currently self-employed, you may well have an accountant. In which case, ask them. OK they might well charge you a few bob for 'tax advice', but it's normally a safer course of action than taking the advice of some random guy off the internet.

jimmo

To coin a phrase, you may need to go back to basics.
If you can sell your current home for £200k and move into your late father's house you will have the best part of £200k in your pocket or bank account with no tax consequences.
If you stay where you are and sell your late father's house for £230k you will have the best part of £230k in your pocket or bank account with no tax consequences.
So what is your problem?

Credit-Crunched

jimmo wrote: »

To coin a phrase, you may need to go back to basics.
If you can sell your current home for £200k and move into your late father's house you will have the best part of £200k in your pocket or bank account with no tax consequences.
If you stay where you are and sell your late father's house for £230k you will have the best part of £230k in your pocket or bank account with no tax consequences.
So what is your problem?

How will selling his fathers property not trigger a CGT issue?

noh

Credit-Crunched wrote: »

How will selling his fathers property not trigger a CGT issue?

Because when the OP inherited his fathers house its accusition value for CGT purposes was the value on the day of death.
As this was very recently the property is very unlikely to have increased in value therefore no CGT liability.

jamesd

jamesd wrote: »

You could take a mortgage against either property to limit the amount of capital that you're transferring into the letting business to something less than the full value of the property.

antrobus wrote: »

Taking out a mortgage against the property that is being rented out will limit the amount of capital that you're transferring into the letting business. Taking out a mortgage against any other property won't.

Easy bit first, since BIM45700 is explicit that a BTL mortgage can be used to extract capital from a business, as you wrote and I partially wrote:

Example 2

Mr A owns a flat in central London, which he bought ten years ago for £125,000. He has a mortgage of £80,000 on the property. He has been offered a job in Holland and is moving there to live and work. He intends to come back to the UK at some time. He decides to keep his flat and rent it out while he is away. His London flat now has a market value of £375,000.

The opening balance sheet of his rental business shows:
Mortgage £80,000 Property at market value £375,000
Capital account £295,000

He renegotiates his mortgage on the flat to convert it to a buy to let mortgage and borrows a further £125,000. He withdraws the £125,000, which he then uses to buy a flat in Rotterdam.

The balance sheet at the end of Year 1 shows:
Mortgage £205,000 Property at market value £375,000
Capital account B/F £295,000
Less Drawings £125,000
C/F £170,000

Although he has withdrawn capital from the business the interest on the mortgage loan is allowable in full because it is funding the transfer of the property to the business at its open market value at the time the business started. The capital account is not overdrawn.

So here we have a mortgage secured on the property that is used to release capital from the business which is then used to purchase a residential property. No disagreement between us here so far, I think. And this may be sufficient for WLM21's purpose.

Now we move on to BIM45685:

BIM45685 - Specific deductions - interest: Security for the funds

The security for borrowed funds does not determine the use of those funds. It is very common in small businesses for loans to be secured on the proprietor’s home, because that is the only substantial owned asset. This is not relevant to the consideration of the use of the funds borrowed. Similarly guarantees given by another person do not affect the use of the funds.

Alternatively a loan may be secured on a business asset and yet be used for a non-business purpose (see example 3 at BIM45675 and example 3 at BIM45700).

Example

Mr Y has been driving an HGV for several years. He gets the opportunity to buy a nearly new vehicle for £25,000 if he can put down a deposit of £5,000. His home mortgage building society lets him borrow that money as he has equity of £20,000 in his house. The loan is secured on his house. This does not prevent the interest on the loan of £5,000 being accepted as incurred wholly and exclusively for business purposes, since the loan has been used to fund the acquisition of a business asset. The security is not relevant.

So for the reasons above, I disagree that a loan on the residential property is not acceptable for the purpose of withdrawing capital from the business, including at the moment the property is transferred into the business.

Further note this document from DSH Chartered Accountants which covers such things as withdrawing capital from a BTL business.

You may well know more than I do about this so if you'd care to explain further why you don't believe that a loan secured on the residential property would be acceptable for withdrawing capital from a business I'd be very interested in your reasons.

Should you disagree, would you also disagree if WLM21 was to take out a bridging loan or BTL mortgage then after a few days replace whichever was used with a residential mortgage secured on the other property, with the business purpose of reducing the interest rate paid on the loan?

Thanks for the CGT correction! Agree that a PPR declaration isn't strictly required since the facts will determine it, but it seems prudent so specify which home is to be used while either could be because residence is at both locations for a while.

antrobus

jamesd wrote: »

Easy bit first, since BIM45700 is explicit that a BTL mortgage can be used to extract capital from a business...

Agreed. Which is what I said above. I was just pointing out that taking out a mortgage against the property that isn't part of the letting business doesn't of itself have any effect on the amount of capital in the lettings business. Where the OP to raise a mortgage on the father's house to carry out the necessary works this would have no effect whatsover on the amount of capital in the business.

jamesd wrote: »

Agree that a PPR declaration isn't strictly required since the facts will determine it, but it seems prudent so specify which home is to be used while either could be because residence is at both locations for a while.

A PPR declaration is always an option not a requirement. It's not even an option that the OP need even consider at this time as the OP only owns one property. The other is owned by the estate of Mr OP snr deceased. From the sound of things, OP's existing home (the one that he intends renting out) is pretty much up together, and would thus be ready-to-rent the minute the removals van has left. There wouldn't be much point in the OP in opting to nominate his father's house as his PPR, because that's the one that he's going to live in anyway, so it's all just an unecessary complication that an ordinary mortal doesn't even have to think about.