Tax advise needed to rent or sell

hilla_2

My mum died 24 years ago and 5 years later my dad remarried. My Dad owned a semi detached bungalow which my mum and him bought in 1965. When my dad remarried, his new wife moved from a rented flat into the bungalow.

My dad rewrote his will so that on his death we, his 3 children, would inherit the house but his second wife, our step mum, had the right to live in the property rent free until she died. We were all happy with this.

About 6 years ago my dad transferred the house into our names with the same proviso that out step mum could live there after his days. I think he was concerned that somehow the house might end up going to her children and not to us.

My dad is now 88 and suffering from dementia. They live about an hour away from my sister and myself and we have encouraged them to move nearer so that we can support them on a daily basis.

This is where it gets complicated.
In the summer my husband retired and we decided to use some of his lump sum to buy a flat to renovate. the flat cost £70000 and we spent £28000 renovating it (this included solictors costs, mortgage costs etc). It has recently been valued at £120000 so an increase of £22000. We were unsure whether to rent it or sell it.

Just before Christmas my dad and his wife were really poorly with chest infections and my dad needed help with personal care. The situation deteriorated and the GP almost admitted him to hospital. They have now conceeded that they need more help and are willing to move nearer to my sister and myself.

We showed them the flat which we have renovated to a high standard and they reallylike it. They are very happy to move in there.

We have a mortage and a loan on the flat so will need to charge them rent. Do we sell the bungalow and buy the flat or do we rent the bungalow and use the rent to pay the rent on the flat?

Some problems on renting the bungalow and renting the flat with the proceeds. As my 2 sisters own the bungalow with me what do we do about declaring the rent for tax if all the rent from the bungalow is going to me to pay the rent on the flat. My sisters won't be having any of the rent so therefore shouldn't have to pay tax on it. Would the taxman accept that I have all the rent? I do not currently use any of my taxable allowance wheras one of my sister is a higher tax payer and the other one is a basic tax payer. Would the taxman think we are trying to avoid tax by all the rent coming o me? I have a interest only mortgage on the flat so would prefer to pay tax on the rent received from the flat so I could offset the mortgage. Perhaps I ought to say at this time that the flat is in my name not my husbands as he is a higher rate tax payer and I currently have no income.

If we sell the house and buy the flat with the proceeds what capital gains can we expect to pay? I'm not quite sure when my dad transferred the bungaow to us but I don't think it has gone up in value in the last 5 years- it may even have gone down. I'm guessing we won't have to pay capital gains on the bungalow. If I sell the flat to the 3 of us and make a profit of £18000 how much capital gains would I have to pay?

Just don't know which way to go on this one. Advantages and disadvantages both ways.

hilla_2

anybody can answer this?

Annisele

I think you've got several issues - financial, legal and moral ones - and I'm afraid I don't envy you trying to sort them out. I'm not an expert on any of this, but some of my concerns would be:

• What sort of mortgage do you have on the flat? If it's a standard buy-to-let mortgage, you won't be allowed to let it to a close relative (i.e. to your Dad).
• If you own the flat, and you are receiving rent from the flat, then you need to declare the rent to the taxman. However, if you (and your sisters) own the bungalow, then I don't see where your Dad will be getting the money to pay the rent. (I know you and your sisters will give it to him - but I'm not sure of the tax treatment of money you give him so it can be paid back to you in rent.)
• Depending on the value of the bungalow, there may ultimately be a tax issue with your Dad having given it away but continued to live in it. On the face of it, that's a "gift with reservation" - so it might still be in his estate for inheritance tax purposes.
• What do you plan to do if your Dad dies before your stepmother? Would you let her continue to rent the flat? And if so, who would pay the rent?
• Does your Dad still have capacity to make his own decisions about his finances?

The neatest (but possibly not the best) solution is probably for you and your sisters to sell the bungalow and then give the money to your Dad. He could then (depending on the capacity point) make a will saying what he wants to happen to that money - but if he wants to provide for both his wife and his children, that could be complex.

On the capital gains point, if the bungalow hasn't gone up in value in the last five years then there are no gains - so that wouldn't be an issue.

Mattygroves2

Re the rent and taxation:

- if your sisters want to maintain their equal shares in the bungalow then they you each will have to declare 1/3 of the rental profit to the taxman and pay the tax appropriate (possibly 0% for you and 20% and 40% for your sisters)
- if you and your sisters then give your father the net rent received there will be no tax to pay on the gift
- the profit on the rent from the flat will be taxed on you alone as it would be in your name only

So you are potentially putting your father in a delicate position as he is dependent on you and your sisters giving him the money to then pay the rent on the flat. You'll also lose the tax on the way through so the rent on the bungalow needs to be higher than the rent on the flat to make it work.

The cleanest way would be for you and your sisters to sell the bungalow and give your father the money to fund his own life which may need to include nursing care in the near future. Anything that is left will be distributed as his existing will as I assume he is no longer able to make a new one.

hilla_2

Annisele wrote: »

I think you've got several issues - financial, legal and moral ones - and I'm afraid I don't envy you trying to sort them out. I'm not an expert on any of this, but some of my concerns would be:

• What sort of mortgage do you have on the flat? If it's a standard buy-to-let mortgage, you won't be allowed to let it to a close relative (i.e. to your Dad).
• If you own the flat, and you are receiving rent from the flat, then you need to declare the rent to the taxman. However, if you (and your sisters) own the bungalow, then I don't see where your Dad will be getting the money to pay the rent. (I know you and your sisters will give it to him - but I'm not sure of the tax treatment of money you give him so it can be paid back to you in rent.)
• Depending on the value of the bungalow, there may ultimately be a tax issue with your Dad having given it away but continued to live in it. On the face of it, that's a "gift with reservation" - so it might still be in his estate for inheritance tax purposes.
• What do you plan to do if your Dad dies before your stepmother? Would you let her continue to rent the flat? And if so, who would pay the rent?
• Does your Dad still have capacity to make his own decisions about his finances?

The neatest (but possibly not the best) solution is probably for you and your sisters to sell the bungalow and then give the money to your Dad. He could then (depending on the capacity point) make a will saying what he wants to happen to that money - but if he wants to provide for both his wife and his children, that could be complex.

On the capital gains point, if the bungalow hasn't gone up in value in the last five years then there are no gains - so that wouldn't be an issue.

Oh dear- what a disaster- the biggest being that we won't be able to rent to my dad if it is buy to let mortgage, is that the same for every buy to let mortgage?

hilla_2

Annisele wrote: »

I think you've got several issues - financial, legal and moral ones - and I'm afraid I don't envy you trying to sort them out. I'm not an expert on any of this, but some of my concerns would be:

• What sort of mortgage do you have on the flat? If it's a standard buy-to-let mortgage, you won't be allowed to let it to a close relative (i.e. to your Dad).
• If you own the flat, and you are receiving rent from the flat, then you need to declare the rent to the taxman. However, if you (and your sisters) own the bungalow, then I don't see where your Dad will be getting the money to pay the rent. (I know you and your sisters will give it to him - but I'm not sure of the tax treatment of money you give him so it can be paid back to you in rent.)
• Depending on the value of the bungalow, there may ultimately be a tax issue with your Dad having given it away but continued to live in it. On the face of it, that's a "gift with reservation" - so it might still be in his estate for inheritance tax purposes.
• What do you plan to do if your Dad dies before your stepmother? Would you let her continue to rent the flat? And if so, who would pay the rent?
• Does your Dad still have capacity to make his own decisions about his finances?

The neatest (but possibly not the best) solution is probably for you and your sisters to sell the bungalow and then give the money to your Dad. He could then (depending on the capacity point) make a will saying what he wants to happen to that money - but if he wants to provide for both his wife and his children, that could be complex.

On the capital gains point, if the bungalow hasn't gone up in value in the last five years then there are no gains - so that wouldn't be an issue.

my dad's estate won't be enough to pay inheritance tax so that's that one out of the way.
If my dad died before my step mother the plan would be to just continue renting out the house to get the rent to pay the rent on the flat.

hilla_2

The neatest (but possibly not the best) solution is probably for you and your sisters to sell the bungalow and then give the money to your Dad. He could then (depending on the capacity point) make a will saying what he wants to happen to that money - but if he wants to provide for both his wife and his children, that could be complex.

why is this the best solution? Could we not just sell the bungalow and the three of us buy the flat for them to live in but keep it in our names as the inheritance tax side is not relevent?

oldbaldman

Consider and take professional advice on perhaps transferring the borrowing that you have to the bungalow, buy your siblings out? Rent that out to tenants, use the income to compensate you for the fact that they are living in your flat.

It's an option.

obm

booksurr

Mattygroves2 wrote: »

Re the rent and taxation:

- if your sisters want to maintain their equal shares in the bungalow then they you each will have to declare 1/3 of the rental profit to the taxman and pay the tax appropriate (possibly 0% for you and 20% and 40% for your sisters)

the sisters could make a declaration of trust in which they sign over the beneficial interest in the bungalow to the OP (whilst retaining 1/3 each legal ownership).

That way OP could receive 100% of the rental income produced by the bungalow whilst the other 2 sisters still retain their share of the inheritance.

Annisele

hilla wrote: »

Oh dear- what a disaster- the biggest being that we won't be able to rent to my dad if it is buy to let mortgage, is that the same for every buy to let mortgage?

Most buy-to-let mortgages prohibit letting to close family members. Some - often called "regulated" buy-to-let mortgages - do allow you to let to family members, but the criteria for getting those mortgages are different to the criteria for the other kind.

What sort of mortgage do you have now on the flat?

hilla wrote: »

my dad's estate won't be enough to pay inheritance tax so that's that one out of the way.
If my dad died before my step mother the plan would be to just continue renting out the house to get the rent to pay the rent on the flat.

That might leave her entirely dependent on your goodwill (and to some extent dependent on you and your siblings not getting divorced/going bankrupt/dying).

How exactly do you own the bungalow now? You say it's subject to the proviso that your stepmother can continue to live there, but is that set out in writing/in any trust document anywhere?

hilla wrote: »

The neatest (but possibly not the best) solution is probably for you and your sisters to sell the bungalow and then give the money to your Dad. He could then (depending on the capacity point) make a will saying what he wants to happen to that money - but if he wants to provide for both his wife and his children, that could be complex.

why is this the best solution? Could we not just sell the bungalow and the three of us buy the flat for them to live in but keep it in our names as the inheritance tax side is not relevent?

I didn't say I thought it was the best solution - I said I thought it was the neatest. But I'm confused by your response; I thought you already owned the flat? Why would "the three of [you]" buy it when it's already yours?

Overall, I think you need proper paid-for professional advice on the whole situation.

hilla_2

Annisele wrote: »

Most buy-to-let mortgages prohibit letting to close family members. Some - often called "regulated" buy-to-let mortgages - do allow you to let to family members, but the criteria for getting those mortgages are different to the criteria for the other kind.

What sort of mortgage do you have now on the flat?



That might leave her entirely dependent on your goodwill (and to some extent dependent on you and your siblings not getting divorced/going bankrupt/dying).

How exactly do you own the bungalow now? You say it's subject to the proviso that your stepmother can continue to live there, but is that set out in writing/in any trust document anywhere?



I didn't say I thought it was the best solution - I said I thought it was the neatest. But I'm confused by your response; I thought you already owned the flat? Why would "the three of [you]" buy it when it's already yours?

Overall, I think you need proper paid-for professional advice on the whole situation.

i have a buy t let which doesn't allow us to rent to a close family member so we have decided to sell the bungalow and my two sisters will buy a third each of the flat.