avoiding stamp duty and captital gains

jovizak

Hi. I am currently on the deeds(3 way split) of a second property jointly owned with my mother and father.
I have my main residence that i currently live in. We bought the second property to renovate as it was in need of major repairs. And we were going to sell it on, we have now finished the house and my wife now wants to live there as it is now a really nice place.
We have a mortgage of aprox 130k outstanding on my current property and i have a good interest rate, its value is aprox 230K i approached the mortgage company to see if i could port over the rate onto the renovated property and retain the mortgage ammount, initially they said yes but then said as you part own the property you cant port the mortgage.
If i have my name removed off the deeds then i can port it. Ideally I want to keep the rate and a new mortgage will be a lot more expensive! I will need to sell my main residence and purchase the property from my folks, there may be some allowance for gifting some of the property to me i am told but i they will want approx 90K. There will hopefully be some cash left over which i am going to try to buy another property to rent out. This would mean i could effectively buy a BTL without a mortgage and could also gift it to my wife so she recieves the rental income as she does not work and her tax allowance is not being used.
I am wondering what to do, i dont know if i can gift the share to my wife to get off the deeds or if i have to gift my share back to my folks. I dont know what the tax and duty implications are and i would like to keep these to a minimum not only for myself but my folks too. Would anyone there have some worldly wise peices of wisdom they could advise me with please?
Many Thanks

G_M

* If you own / part own the property you can live in it.
* If you sell it, there will be tax liability (for each owner) as it was not a main residence for any of you
* If you want a mortgage on it, all the joint owners will need to be on the mortgage.
* Why buy the BTL outright and lose the tax allowances of the mortgage?
* Do you know what's involved with BTL (see below)?

As for

If i have my name removed off the deeds then i can port it.

Surely you mean remove the other names from the deeds so that you fully own? Then you could port your existing mortgage.

New Landlords (information for new or prospective landlords)

00ec25

for clarification lets call them:
house A = current main residence lived in by you and your wife with joint (?) mortgage in place with you and wife both on mortgage and deeds. You are trying to port this mortgage over to house B to fund buying out your parents. You expect to sell House A for more than the mmortagge and use this excess to fund purchase of property C

house B = property owned 1/3 by you alone (not your wife) and 2/3 by your parents. You intend to move in here as new main residence of you and your wife.

House C = property you propose to buy as separate BTL. To be held in name of wife only so rental income tax liability is hers only


since you and parents bought property B with the intention from the outset of renovating and selling on then IF you did sell it now you and your parents would be liable to Income tax on the profits from the sale not CGT, since you are in fact trading (ie subject to income tax) as property developers not speculating in property investment (ie subject to capital tax)

moving on from that issue....as you now propose to live there then its existence to date is now clealry as an investment property so subect to CGT

House A - you can sell this free of any tax implications as it is your main home.

House B - you can gift your 1/3 share of this to your wife without any CGT tax implications as gifts between married spouses are free of tax. This would remove you from its deeds. I know nothing about mortgages so cannot advise further on your financing plans for house B

House B - you wish to buy your parents out of their 2/3 share. This is a disposal by them for CGT purposes and becuase they are selling to a "connected person" you can pay them whatever amount you like but they will have to pay tax based on the sale "price" being the full open makret value of the property , which may be higher than what you paid then if you agree a discount.

House C - as you say you could buy it and gift it to her or she could buy it herself since it is being funded by the sale of a jointly owned asset (house A) so its as much her money as it is yours

there is nothing you can do about stamp duty, it will be payable on the total consideration (ie cash ) paid in each case . These are not linkled transactions so each property will either be above the threshold or not

jovizak

Thanks G_M. Well according for me to port the mortgage over i am not allowed to already own it. They have confirmed that i can port the mortgage only if my name is not on the deeds prior to me purchasing it. The reason for buying the BTL out right is so i can gift the rental property to my wife if it has a mortgage on it, they may not let us gift i understand as she may not fill the criteria for lending as she is originally non eu and been here only a year. Also in effect the ported morgage will be low interest and is in effect buying the BTL property thus lower cost....i think!

jovizak

Thanks too 00ec25. Yes my appologies my paragraphs were not too clear, sorry about that. To clarify further,

House A is lived in with me and my wife, it is not jointly owned or joint mortgage. It is just my name on deeds and mortgage.

The statement I made regarding the is generally correct, our original thoughts were to buy the property renovate it, then move into it and then update my original property then make a decision wether to sell, keep or rent. My wife loves the place so we had house 'A' valued and determined that it would be non cost effective to renovate and extend.

Your points of consideration are very interesting and i will also investigate the capital gains costs. I am also discussing the facts with the mortgage lender to make sure i can still buy the place with my wife on the deeds.

Thank you for you input, greatly recieved

jovizak

So im kind of going round this a different way now.
My current house A will be re-mortgaged on a buy to let basis, outstanding mortgage is 132K. I will also transfer equity on house B so in effect buy my parents shares for 90K. this covers the cost of original purchase and repairs of property B. I will take on a mortgage of 175K at a low residential rate which will also pay my parents their 90K and will reduce the BTL mortgage on house A to 62K therefore reducing overall costs. I would like to know if there are any capital gains implications to my parents as in effect i am just paying them back the costs they incurred buying and repairing the property, or will it be determined on the market value?
According to the solicitors there will be no stamp duty to pay as it is a re-mortgage and a transfer of equity which is good news, but i wonder if anyone can tell me about the capital gains implications to my folks please?

00ec25

I explained the CGT implications for your parents above.

they are liable for CGT on the difference in £ between their original purchase cost for buying the property and its current open market value - the fact you pay them 90k is irrelevant to the tax calculation.
the gain in connected persons cases is the differncne bwteen original cost and market value not what they actually get in cash

it would be a lot easier to explain if you post some numbers for house B

1) original purchase cost paid by parents (ie the money they paid to buy 2/3 of it)
2) any money they (not you) have spent on improvmeents (not repairs) since they owned it
3) current market value of the whole of the house ie. how much would an estate agent value it for selling to strangers

jovizak

Ok thank you. That seems to me to be a very unfair system. After all they are only getting back the money they have in effect loaned to buy and repair the property. Its not like the property is being sold on and a huge profit is being made. I dont really see the fairness in it if they are just getting their costs back and they then have to pay a capital gain on the market value. There must be another way as i can't burden them with such a tax bill surely!
I was just stating the 90K as fortunately it must fall below the Stamp duty threshold and i assume thats why there is no stamp duty to pay.

jovizak

Ah i see i missed some of your comments earlier my appologies for that!
So thwe figures are House B current market value is aprox 245k.
All three of us are on the deeds as we all purchased the property.

It was purchased between us for 70k plus normal costs, my father putting in the lions share of aprox 55k. I took on the main rebuild costs and my father added a further 35k to make an extension. There were futher improvements in updating the property as it was a run down place, new kitchen, garage roof central heating dg windows, insulation etc etc these costs ammounted to aprox 50-60K which i put in to it.

00ec25

jovizak wrote: »

Ok thank you. That seems to me to be a very unfair system. After all they are only getting back the money they have in effect loaned to buy and repair the property. Its not like the property is being sold on and a huge profit is being made.

Sorry but you are blind - it is not "unfair" - if this rule did not exist then you are being handed a property worth £x by your parents at a significnatly lower price than they would be prepared to sell it for to a stranger. That is called tax evasion as it would hand property down the generations without anyone ever being taxed on their inheritance!!! Therefore enforcing open market value prevents tax evasion and so is fair to everyone else who is a law abiding taxpayer

Anyhow
Taking your figures at face value - differentiating between "repairs" (excluded from CGT) and "capital" improvements (included in CGT) is a very specialist area which HMRC just love to catch you out on, your parents CGT exposure is...

Current value 2/3 x 245 = 163
original cost = 55 plus improvements = 35 so total cost = 90
as the property is owned by parents then I will assume the ownership is on an equal footing, this is important as each parent is taxed as an individual person on their share so your mothers tax bill may be different to your fathers. For example if the 35k cost of improvements was paid from a joint account then your mother also shares 50% of that cost

tax is all about the details! Go see an accountant to do it for you ...

for example - lets assume the 35K came from a joint account (ie is attributable to both your dad and your mum)

gross gain on property 163 - 90 = 73

dad's share 73/2 = 36.5 less personal allowance 10,900 = 25,600
tax due 25,600 x 18% (= £4,608) or 28% (7,168) depending on dad's tax status

mums share = ditto

so your parents would receive £90,000 from you and from that would pay (worse case) as much as 14,336 in tax leaving them with 75,664

so if your parents objective is to get back only the money they spent on the property then you WILL have to pay them an amount to cover their own tax liability plus the original 90k outlay....

jovizak

Thanks for the reply. I do see the point regarding the open market valuations, still makes it a bitter pill to swallow tho. For the record tho, I am not looking to evade tax. I just want to minimise the exposure shall we say. I have always payed what I owe, always worked damn hard to get what I have and have never used any benefits off the government, and in this instance I am more than willing to pay my fathers tax request as he is no spring chicken. So I would class myself as a law obiding tax payer.
I thank you greatly for your breakdown of the figures which are explained well enough even for me to understand.
I never imagined that this opportunity would be so complex and difficult to navigate through and its nice that for once I have some clear answers. Even talking to my accountant mortgage advisor and solicitors there always seems to be grey areas they cant or wont advise on.
Many thanks again. Hope I did not offend with my 'unfair' statement.