Being part gifted a property - advice needed

Technoholic

Hi all

Bit of a long one so hopefully I'll explain it ok.

My dad currently owns a flat that he is renting out, and has done for 10+ years. This flat was always intended to be part of my inheritance one day but he has decided now that he no longer wants to manage the flat and would like to gift it to me now. So here are the facts:

Property valued around £200,000
Outstanding BTL mortgage in his name of around £97,000, therefore he has equity of about £103,000 in the property.

He wants to effectively transfer the property and mortgage to me to "take over" but I know it's not as simple as just putting it all in my name. So I'm speaking to my mortgage broker that arranged our previous mortgage and am looking at a concessionary purchase with a BTL mortgage using the equity as deposit.

The property is bringing in around £750/month so it should be easily enough to cover the mortgage and more.

My main questions are around tax for both me and him. If the purchase goes ahead as per the above method, who is liable for what tax to be paid?

It should be noted that my dad actually lives in Germany and has done for about 7 years although he is just about to get residency which normally requires 8 years over there but they are taking into account the fact he also previously lived and worked there for 3+ years a while back. I'm not sure if that makes any difference for tax purposes.

Can anyone give me any advice? I\m speaking to my broker tomorrow so will know more about the mortgage side but if there is any other way of going about this it would be good to know.

Thanks

da_rule

If you can get a mortgage to clear the current mortgage there is no reason why you cannot be gifted the property.

Your dad will have to consider capital gains tax, which will be based on the open market value of the flat.

What do you intend to do with the flat? Do you want/understand what is involved with being a landlord?

Technoholic

Thanks, its CGT that I am most concerned about I guess, getting a mortgage to cover the existing mortgage should be fine providing there is a lender who will support these circumstances of concessionary purchase.

Yes I want to/happy to be a landlord, I pretty much manage the flat on my dad's behalf anyway at the moment (I actually used to live there for years so I know it inside out), and as I intend to hopefully build up a small portfolio over time, this will be a good start. The current tenant is on a 3 year lease, 2 remaining so I would want him to stay as he is a good tenant, and a good start for me taking it over "officially"

00ec25

if your father has lived outside of the UK for 7 years and is therefore non UK resident (see here https://www.gov.uk/tax-uk-income-live-abroad )

he will be subject to Capital Gains tax using the full value of the property when he gives it to you, see here: https://www.gov.uk/guidance/capital-gains-tax-for-non-residents-uk-residential-property

read the above carefully, paying particular attention to the 2015 rule change for which he will need a robust valuation which if he does not already have one, he will be wise to pay a professional land valuer to do it as it will be scrutinised by HMRC

Technoholic

00ec25 wrote: »

if your father has lived outside of the UK for 7 years and is therefore non UK resident (see here https://www.gov.uk/tax-uk-income-live-abroad )

he will be subject to Capital Gains tax using the full value of the property when he gives it to you, see here: https://www.gov.uk/guidance/capital-gains-tax-for-non-residents-uk-residential-property

read the above carefully, paying particular attention to the 2015 rule change for which he will need a robust valuation which if he does not already have one, he will be wise to pay a professional land valuer to do it as it will be scrutinised by HMRC

Thanks, yes I see that, so rebasing from 2015 and using the time apportioning method appears to give the lowest CGT liability of about £1500 for my dad to pay, based on rough figures I used in the calculator. Obviously would get accurate figures when the time comes.

So is CGT the biggest issue here providing mortgage etc is straightforward?

00ec25

Technoholic wrote: »

So is CGT the biggest issue here providing mortgage etc is straightforward?

SDLT will be payable by you, the rate depends on what your own circumstances are in terms of existing property, which you haven't told us

have you really not done such basic research yourself?

Technoholic

Might sound basic to you, well done.

I only found out about this opportunity a day ago so no, this is my first port of call, apart from some quick research which didn’t help me much, hence coming here

da_rule

Op, do you already own a property? If so, you’ll have to pay the higher rate of stamp duty on the amount you give your dad to clear the mortgage.

If you don’t already own a property you won’t have to pay stamp duty, but it’ll also mean that you aren’t classed as a first time buyer for stamp duty and help to buy etc.

Couple of other things for you and your dad to consider:
1) If your dad dies within 7 years the gift element will still form part of his estate for inheritance tax calculations;
2) If he ever comes back to the UK and needs care the gift could be seen as a deprivation of capital/assets.

AnotherJoe

Odds are the OP does own another house since they refer to "previous mortgage"

AdrianC

Your father doesn't want the hassle of managing a rental property, even though he isn't having the hassle - you currently are.

You say you want to take it all on, but do you really understand the full implications? Are you 100% sure that this hypothetical BtL empire is actually a good investment in a business you really want to run and fully understand?

£750/mo income from £200k is 4.5% yield - but you're going to have to cover the ~£100k mortgage etc from that. Let's say 5% interest on that. You're now down to ~2% yield. Before tax, before voids/damage/maintenance etc. Oh, and SDLT and, and, and... It's going to be a couple of years before you see a single penny in actual profit - then you'll probably actually see something like 1-1.5% or so at most. You could do better by investing the money elsewhere, for far less hassle.

You have a head start on others looking to move into the residential letting industry - you can actually look at the historical figures. So what do your father's accounts show as the return (before tax, obv, because his situation differs) over the last few years? How does that translate into actual annual income, after the current and forthcoming tax regime is taken into account?

Wouldn't it be so much easier if your father simply sold the flat and gave you the £97k value instead? If he did that, would your best move really be to go out and buy THIS flat with a 50%+ LtV BTL mortgage?

Don't get hung up on "But the flat is my inheritance!". No, the value of the flat is your inheritance. The flat itself is just a business asset - do you really want to run that (not particularly profitable) business? Or, rather, it could be your inheritance, if he was dying now. Since he isn't, it's just a substantial gift.

AnotherJoe

Good points.
I'll add to that, If OPs current residential mortgage is say 2% then they could get 2% risk and tax free by using it to pay that much off their mortgage. It might also reduce the LTV to enable a drop in mortgage rate as well.
Then for their inheritance they could put the mortgage payments they are now not making towards a pension and get the tax bump on that.