Implications of keeping inherited property and buying a home to live in

pjs493

My husband died suddenly last year. When he died we were living in accommodation provided by his employer and I can remain in it for a grace period which expires in summer 2025. 

My husband bought a flat in his early 20s as a single man and lived in it for a few years before his job took him elsewhere and he moved into the provided accommodation and rented out the flat. I’ve never technically lived in the flat although I spent time there before we married but bills etc were never in my name. We had considered changing the flat into both of our names a few times but decided to leave me off the mortgage so that we could buy a rental property with me as the sole owner with the benefits of being a first time buyer. Obviously his death means that plan is off the table.

When my husband died I inherited the flat and following Probate being granted I’ve paid off the mortgage. 

The flat was great for a single man or a couple, but it’s not big enough for me, our children, and two dogs. It currently provides me with a rental income and the tenants have been in a long time and would like to stay there until they have saved up to buy a place of their own. 

When the children and I have to move out of where we currently live, my plan is to buy a house with or without a mortgage depending on what I decide on as a budget. 

My question is, what are the implications of becoming a second home owner? Stamp duty? Capital Gains Tax? Anything else? 

The flat has barely increased in value since my husband bought it 15 years ago. I’m considering selling the flat so that I have more money towards a house when I have to move. I’m weighing up releasing the equity and continuing to rent the house out to continue receiving rental income. If I sell the flat it means I can buy a larger house for myself and the children and potentially avoid having to have a mortgage. 

I’d be grateful if anyone can offer suggestions and knowledge of the implications of having two properties. 

user1977

You're potentially liable for CGT on the flat already (starting with the inheritance value) as it isn't your own residence, so that's going to be the same whether or not you buy an additional property. Stamp duty on your purchase would be at the additional rate because you already own a residential property. Plus obviously you have equity tied up in the flat and all the hassle and risks of being a landlord (though hopefully a net income and eventually some sort of capital gain). But you might be better with your money invested somewhere else.

Olinda99

the tax implications are as follows

1. if you buy yourself a house to live in you will pay an extra 3% stamp duty because you already own a property. if you sell the flat first then obviously you won't be liable for this extra 3%

2. you need to value the flat as of the date of probate. if the flat goes up between then and when you do sell then you will be liable for capital against tax on the profits although you can deduct expenses such as original buying costs, selling fees, estate agents fees and small allowance.

Keep_pedalling

Olinda99 said:

the tax implications are as follows

1. if you buy yourself a house to live in you will pay an extra 3% stamp duty because you already own a property. if you sell the flat first then obviously you won't be liable for this extra 3%

2. you need to value the flat as of the date of probate. if the flat goes up between then and when you do sell then you will be liable for capital against tax on the profits although you can deduct expenses such as original buying costs, selling fees, estate agents fees and small allowance.

A slight correction it is the value at the date of death that is the starting date for a CG calculation not date of probate. 

Albermarle

Another option is to get a mortgage, and use the rent from the flat to help pay the monthly payments.
Of course keeping the flat and being a landlord, has its pros and cons.
Couple of other points
You do not mention if you are working, so maybe would be difficult to actually get a mortgage.
On the other side if you want to sell the flat, you will have to get the tenants out, which can be a slow process.
If they have to find a new rental the market is very difficult, in some areas at least. So they might refuse to move out until they absolutely have to.

sheramber

The rental income is taxable income so you may have to ay tax on it, depending how much it is. 

At present you have a property allowance of £1000

pjs493

user1977 said:

You're potentially liable for CGT on the flat already (starting with the inheritance value) as it isn't your own residence, so that's going to be the same whether or not you buy an additional property. Stamp duty on your purchase would be at the additional rate because you already own a residential property. Plus obviously you have equity tied up in the flat and all the hassle and risks of being a landlord (though hopefully a net income and eventually some sort of capital gain). But you might be better with your money invested somewhere else.

Because of my husband’s job meaning that we couldn’t live in the house (due to the exigencies of military service) it was considered our primary residence. So I don’t think I’d be liable for any just because I don’t currently live in it. 

Is capital gains due on an inheritance between spouses?

I’m not concerned with the implications of being a landlord, I’ve been managing the property in that capacity for several years because my husband would often be overseas with the military so it was easier for me to deal with the day to day rental as I was easier to reach in case the tenants needed anything. 

pjs493

Keep_pedalling said:

Olinda99 said:

the tax implications are as follows

1. if you buy yourself a house to live in you will pay an extra 3% stamp duty because you already own a property. if you sell the flat first then obviously you won't be liable for this extra 3%

2. you need to value the flat as of the date of probate. if the flat goes up between then and when you do sell then you will be liable for capital against tax on the profits although you can deduct expenses such as original buying costs, selling fees, estate agents fees and small allowance.

A slight correction it is the value at the date of death that is the starting date for a CG calculation not date of probate. 

The value of the flat has barely changed in 15 years so I don’t expect it to increase in value over the next year or two. He’s worth pretty much the same as what he paid for it give or take a couple of thousand pounds. 

pjs493

Albermarle said:

Another option is to get a mortgage, and use the rent from the flat to help pay the monthly payments.
Of course keeping the flat and being a landlord, has its pros and cons.
Couple of other points
You do not mention if you are working, so maybe would be difficult to actually get a mortgage.
On the other side if you want to sell the flat, you will have to get the tenants out, which can be a slow process.
If they have to find a new rental the market is very difficult, in some areas at least. So they might refuse to move out until they absolutely have to.

I could buy a second home without the need for a mortgage. A mortgage would allow me to buy something bigger though. 

I have a decent income and have had a mortgage agreed in principle to get an idea of what I could borrow if I wanted to so I can start scoping out properties in my budget. 

I plan on giving the tenants as much notice as possible, that’s why I’m looking into my options now with a view to moving in
 summer 2025. 

pjs493

sheramber said:

The rental income is taxable income so you may have to ay tax on it, depending how much it is. 

At present you have a property allowance of £1000

Thanks for this. Yes I was aware. I’ve been managing the property for years because my husband was often away with the military and used to help him prepare his taxes for the accountant. I’m already set up to do a tax return for this financial year anyway due to different income streams I receive. 

user1977

pjs493 said:

user1977 said:

You're potentially liable for CGT on the flat already (starting with the inheritance value) as it isn't your own residence, so that's going to be the same whether or not you buy an additional property. Stamp duty on your purchase would be at the additional rate because you already own a residential property. Plus obviously you have equity tied up in the flat and all the hassle and risks of being a landlord (though hopefully a net income and eventually some sort of capital gain). But you might be better with your money invested somewhere else.

Because of my husband’s job meaning that we couldn’t live in the house (due to the exigencies of military service) it was considered our primary residence. So I don’t think I’d be liable for any just because I don’t currently live in it. 

Is capital gains due on an inheritance between spouses?

I think you're right about the CGT relief for that reason, but have you checked when that ends (if it hasn't already)?

As I said, CGT is calculated with the start value being whatever you used for probate. The capital tax on the inheritance itself is Inheritance Tax, and that's nil on any estate passing between spouses.