Capital Gains Tax / Income Tax issue

In_for_a_penny

Hello,

I live with my partner and our 9 month old son. We own our own home and consequently have no mortgage outstanding (apart from £1 which allows us to keep the deeds at the building society) on the property. We are currently looking at selling our home and buying another, larger one.

A couple of years ago, I bought a second property which my parents live in. They sold their original home to release the equity and moved into the one purchased by me. They pay all their own bills and give me a modest payment per month. This is used by me towards the mortgage repayments but by no means covers the whole amount. In addition to this, I pay for a mortgage term assurance policy, buildings insurance and, where possible, any maintenance necessary.(Boiler service etc.)

As this is my parents' 'home' they pretty much do what they like regarding furnishings, fittings, decoration etc. and have even recently added a conservatory to aid their enjoyment in retirement. I do not treat this as a business venture and its immediate sole intention is to provide my parents with a comfortable home as they enter their 'old age'.

Ultimately, I would like any proceeds from the property to be used for our son's education or maybe as a long term investment for him.

I am in full time employment and earn just under the 40% tax threshold. My partner has a self-employed part time business and she earns about £10k per year. She also deals with her income via the self-assessment system.


My questions are:

- What is my position regarding capital gains tax if I were to sell the property or pass ownership to my parents with me as the mortgagee?

- Am I liable for any taxation as I'm paying out more than I am in receipt of?

Thank you in advance to anyone offering advice.

silvercar

You have a loss each year as you pay out more on mortgage interest and expenses than you receive in rent. As this is classed as "unearned income" you can't use it to reduce your tax bill on earned income but you can carry it forward to the next tax year.

If you sold it you would pay CGT on the difference between the sale price and the purchase price less expenses. There are some allowances to reduce your tax bill, taper relief depending how long you've owned it and an annual CGT allowance of £9,200.

There are inheritence tax issues to consider before you pass property to parents. I'm not sure that you can have a mortgage if the property is in your parents' name.

In_for_a_penny

Thanks for your reply Silvercar. However, can you please explain what you mean by:-
"As this is classed as "unearned income" you can't use it to reduce your tax bill on earned income but you can carry it forward to the next tax year." as I'm not sure I understand you.
Thanks again.

silvercar

earned income is money earned from employment or self-employment. Unearned income is money from rent (don't know what else counts as unearned), some archaic assumption that rents pour in and you don't do anything.

Basic difference is that losses from rent cannot be used to reduce the tax you pay on your earned income but can be carried forward to reduce tax from unearned income in future years.