Unsure about the tax implications

Rodders2409

Hello All,

I'll try to sumarise the slightly complicated scenario, and am looking for any and all feedback....thanks in advance.

Due to my fathers passing and the subsequent sale of his home etc, I'm in the position where I'm looking to help my son gain a foothold on the property ladder. I'm satisfied that my own financial situation is sufficiently balanced to be able to afford the plan, I just need to make sure I cover the bases with regards to tax.

So here's the plan.
I've found a property in an area I know well and know it's a good buy, they don't often crop up. I've rented out a property close by for the past 20yrs as an amateur Landlord, and shall continue to do so for as long as I need to. It's rented to a friend for under market rates and I'm OK with that. 

My income is...

£7400 from existing property rental
£4000 Carers Allowance

My tax code is 1257L

I'm looking to purchase at £260K.
BTL mortgage with 25% deposit on a 2yr fixed  @ 4% mortgage ....Interest only 
Rental  - £13,200 pa
Mortgage repayment - £7,920 pa
Maintenance costs - £500 pa

My son has only just started a new job and won't be in a position to buy for 18mths- 2yrs, so I'm looking to rent out the property for that period and when the time comes I'm intending for him to buy the property at a hugely discounted price, circa £150K.
In a perfect world I'd hope for the rental to cover the mortgage set up costs and Stamp duty etc, all totaling circa £12K.

Can someone give me the heads up on the tax implications I'd face in that 2yr period, and if there's a smart way to mitigate for it.

As always, many thanks.

Jeremy535897

Are you really able to get a 75% mortgage for a BTL at 4% fixed for 2 years? Is the property at least EPC C rated (lower than that and there are likely to be future restrictions on letting it without improvements)?

You should pay income tax on the excess of the rent over the maintenance and the balance of personal allowance available, less a 20% tax credit on the interest. The property income on a property let at less than full rent cannot produce a loss.

When you sell the property at an undervalue to your son, market value at that date will be used to calculate your capital gain, not the price he pays you.

Rodders2409

Thanks Jeremy,

Today I received a positive "Decision in Principle" from an established Mortgage Broker, so I guess it's OK....
The property is EPC C and has a 900+yr lease with share of Freehold ets....hence why I'm keen to take up the option.

A quick online calculator has the tax bill as approx £2300 pa..my total tax bill covering all income, which means I'd only cover approx 50% of the total buying process including stamp duty, legals etc....

[Deleted User]

Rodders2409 said:

Thanks Jeremy,

Today I received a positive "Decision in Principle" from an established Mortgage Broker, so I guess it's OK....
The property is EPC C and has a 900+yr lease with share of Freehold ets....hence why I'm keen to take up the option.

A quick online calculator has the tax bill as approx £2300 pa..my total tax bill covering all income, which means I'd only cover approx 50% of the total buying process including stamp duty, legals etc....

Rental income 13200 less expenses 500 is 12700. You have roughly 1000 of personal allowance after taking into account other income - 11700 @ 20% is £2340. Deduct finance costs £7920 @ 20% £1584 - tax due £756?

Jeremy535897

Yes, I think OP was overlooking the 20% tax reduction attributable to the finance costs.

Rodders2409

Thanks Purdy and Jeremy,

Yes, I'd forgotten that there's a 20% relief on the Mortgage interest cost.
So based on the info above, over the two years I'd be recovering >£10K and almost covering the costs of the exercise, pending the sale to my son who hopefully will be in a position to buy it.

Which brings me onto the question of CGT.
I appreciate that it doesn't matter if I'm selling to him well below market rate at that time, but if I sell to him at the same rate as I purchased at I'm not making any Capital Gain, so should  / will I be taxed ?

[Deleted User]

Rodders2409 said:

Thanks Purdy and Jeremy,

Yes, I'd forgotten that there's a 20% relief on the Mortgage interest cost.
So based on the info above, over the two years I'd be recovering >£10K and almost covering the costs of the exercise, pending the sale to my son who hopefully will be in a position to buy it.

Which brings me onto the question of CGT.
I appreciate that it doesn't matter if I'm selling to him well below market rate at that time, but if I sell to him at the same rate as I purchased at I'm not making any Capital Gain, so should  / will I be taxed ?

It really doesn’t matter what amount your son pays for the property. For CGT purposes it will be the market value at that time which will be relevant - best to hire an independent estate agent/valuer to determine same at that time.

Jeremy535897

The point is that you could have made a capital gain by selling the property at market value to a third party, and your choice to forego that profit does not take away the tax liability that may arise.

Rodders2409

Thanks, understood!

I've learnt that I can offset the Stamp Duty paid against any Capital Gains Tax, I appreciate that at the moment theres total uncertainty as to whether prices will rise or fall in the next two years but, for this exercise, I'm hedging bets on possibly increasing by 5% and if they drop then I'll not pay anything 😊

So the general numbers seem to work out like this.....If anyone has feedback I'd appreciate it.
Remembering that I'm not looking to make this a long term revenue generator, its just a bridging position on a property that is hard to find her and would be a reasonable home for my son later.

Property Buy price £260K
BTL Mort interest only £195K over 2 years fixed rate 4%
Mort repayments £660pm - £7920pa

Mort admin fees etc - £6900...yep high!
Stamp duty - £8300

Rental income - £13,200pa
Maintenance expenses - £500pa
20% Tax credit on Mortgage interest - £1584pa

Available unused Annual  Personal Allowance - £1000

So...

Rental income - £13200pa
less £500 expenses = £12,700pa
less £1000 unused PA = 11,700pa
Tax due @ 20% = £2340pa
 
less £1584 (20% Tax credit on Mort) = £756pa Tax to pay

Net income
Rental less Mortgage less Maint' expenses less Tax = £5044pa
Over 2 yrs totaling £10088

Total set up costs
Stamp duty £8300 + Mort fees £6900 = £15,200

The idea that the costs would be covered by the rental income doesn't quite work out to the tune of approx £5K...
£15200 - £10088...but its possibly OK.

With regards to CGT....
IF theres an increase in value at the point of sale to my son, of say 5%, then I'd be paying 18% on £4700 because I can claim relief of the Stamp duty of £8300. Meaning CGT would be £846.
Obviously thats IF theres a rise of 5%...it could be less or more but possibly / probably not much more.

I'm hoping I've not laboured my point and thanks to those who've chipped in, its decision time so any last mullings over would be welcome....cheers!








 

simon_or

£6,900 lender product fees for a 2yr fix on a 195k loan?

Over 2 years that would be the equivalent of an additional 1.8%pa on the interest rate so equivalent to a no-fee 5.8% mortgage if I've got my sums right.

That might well be the most cost effective mortgage option for your scenario but I'd still get a second opinion, especially given that this advice is unregulated, being a BTL mortgage so you can't take a complaint to the FOS later.

Don't forget that you'll get a 20% tax credit on the lender product fees of £6900 as well as that's also considered a Finance Cost.

Rodders2409

Thanks Simon,

Yep I swallowed at that too!

Are you hinting that the might be better BTL mortgages with 'no fees' ?...
I'm only looking to have the BTL mortgage for 2 yrs as a mechanism to secure this particular property, and this mortgage allows me to drop out after 2 yrs...