Tax implications of renting main residence

[Deleted User]

Grumpy_chap said:

[Deleted User] said:

• Potential IHT implications

Estate seems to be £400 k property plus £100k cash / savings / investments.
IHT won't be an issue.

If the property was sold today, would the residential allowance be carried forward indefinitely?
I honestly don't know and have seen conflicting opinions online.

[Deleted User]

moedeeb said:

Thanks all. Our current justification for renting is to provide an income sufficient to fund care for as long as possible before selling the house. Hopefully it is better to preserve her assets in her interest so that she can stay in a suitable care home as long as possible. As soon as we sell the house her assets will deplete at a faster rate with less ongoing income. We will sell if needed 

on CGT she bought for 40K in the 1986  and current value is 400k so am I right in the calculation that gain = £360k (assume we rent for next 5 years) 5/43 as % multiplied by gain 360.* 11.62% = 41,832 at CGT of 20% = £8366

No. The gain will be sale proceeds less improvement costs less costs of purchase and sale. Private residence relief, in months, will be 465/516 of that figure (9 can be added to the period where private residence). 

Annual exemption of £3000 is deductible. 

The gain will be chargeable at 18% or 24% or a mixture of the two. 

Keep_pedalling

[Deleted User] said:

Grumpy_chap said:

[Deleted User] said:

• Potential IHT implications

Estate seems to be £400 k property plus £100k cash / savings / investments.
IHT won't be an issue.

If the property was sold today, would the residential allowance be carried forward indefinitely?
I honestly don't know and have seen conflicting opinions online.

Under the current rules yes.

Bookworm105

moedeeb said:

Thanks all. Our current justification for renting is to provide an income sufficient to fund care for as long as possible before selling the house. Hopefully it is better to preserve her assets in her interest so that she can stay in a suitable care home as long as possible. As soon as we sell the house her assets will deplete at a faster rate with less ongoing income. We will sell if needed 

on CGT she bought for 40K in the 1986  and current value is 400k so am I right in the calculation that gain = £360k (assume we rent for next 5 years) 5/43 as % multiplied by gain 360.* 11.62% = 41,832 at CGT of 20% = £8366

that way of doing the calculation is wrong as it ignores the deemed occupation period of 9 months which is given on the sale of a property that was once a main residence. The % calculation should therefore be done in (exact) months, not years 

Gain 360k (less costs if not already included) 1986 - 2029 (516 months approximately)
Let 2024 - 2029
Main residence 1986 - 2024 (456 months approximately) + 9 months deemed occupation = 465

CGT
360 - (360 x 465/516) = £35,581 less CGT allowance 3,000 = net taxable gain 32,581

"total income" 
income subject to income tax (pension) 28,000 less income tax allowance 12,570 PLUS net taxable gain 32,581 = 48,011
Higher rate tax threshold is 37,700 so 48,011 - 37,700 = 10,311 

CGT payable on 32,581
10,311 @ 24% (higher rate CGT) + 22,270 @ 18% (basic rate CGT) = 6,483 tax payable 

Dazed_and_C0nfused

Although any basic rate band available for CGT could well be reduced by rental income profit on the same tax year.

Keep_pedalling

The other tax issue you need to look at is council tax. Now that this is no longer your MIL’s main residence and is being used for short term lets you may find it is subject to business rates rather than CT. 

Do you have the correct specialist house insurance in place? 

Jeremy535897

Aged 88 and with severe dementia, it is very unlikely that donations are appropriate.

HS283 says:
"Your period of ownership begins on the date you first acquired the dwelling house, or on 31 March 1982 if that is later. It ends when you dispose of it. If you acquire land on which you build a house, your period of ownership begins at the time the dwelling-house comes into force. The final 9 months of your period of ownership always qualify for relief, regardless of how you use the property in that time, as long as the dwelling house has been your only or main residence at some point.

If you’re a disabled person or a resident in a care home the final 36 months of ownership may qualify for relief if you do not have any other relevant right in relation to a private residence. More detail is available in the Capital Gains Tax Manual.

If the dwelling house has not always been your only or main residence, you will need to split the gain. When calculating the proportion of the gain eligible for relief, you multiply the gain by a fraction equal to the periods of occupation (including the final 9 or 36 months where appropriate) divided by the period of ownership (both periods starting at 31 March 1982 if the house was owned before that date). You do not introduce valuations of the property at the dates of changes of use."

https://www.gov.uk/government/publications/private-residence-relief-hs283-self-assessment-helpsheet/hs283-private-residence-relief-2024

moedeeb

Thanks for all the help much appreciated. We do have specialist house insurance and have informed the council of short term letting arrangements. 

I found it odd that the council told us that after a set period we would be considered subject to business rates but because we only have one rental property the rate would be nil. This sounds too good to be true but it is what we were advised by the council (Derbyshire Dales)

The house is a very quaint cottage in Bakewell and can sleep up-to 8 people so fairly marketable for Air BandB.  

We have recently spent about 80k sorting it out after a serious leak (40K was insurance claim)

I will contact an accountant to ensure profit  is reported to HMRC.