Buy to Let Mortgage on inherited property - capital gains tax implications

K_To

Hi,

I inherited my family home in Scotland on the death of my mother and I have let it out to tenants.
I live in a shared house in London and need to buy out my ex partner. I have a small domestic mortgage which I will also seek to repay once the buyout is complete.

I am hoping to obtain a BTL mortgage on my (currently mortgage free) Scottish property to finance the buy out on the London house.

My question: The current value of the Scottish house is considerably more than when I inherited it and would therefore be liable for capital gains tax on the increased value, were I to sell now.

If I use a proportion of the value of that house to buy out my ex in London now (via a BTL mortgage), and later sell the house in Scotland (thus repaying that BTL mortgage), am I correct in assuming that the value for capital gains purposes at that time will be the amount I actually end up with, minus the inheritance value?

i.e., is buying the ex out now with a BTL mortgage a way of reducing capital gains liability in a few years as I will have effectively relinquished that proportion of the property?

Any advice would be gratefully received.

sheramber

No, CGT is based on the gain you have made in the value between the value when you inherited and the price you sell it for , less allowable expenses such selling fees. 

Mortgage interest  ( no capital repayment ) can be claimed as a credit at 20%   against your  rental income. 
You have been declaring your rental profit to HMRC? 

K_To

sheramber said:

No, CGT is based on the gain you have made in the value between the value when you inherited and the price you sell it for , less allowable expenses such selling fees. 

Mortgage interest  ( no capital repayment ) can be claimed as a credit at 20%   against your  rental income. 
You have been declaring your rental profit to HMRC? 

I've been declaring the rental profit throughout.

So, to be clear, for CGT purposes, the full sale value of the house would be used to calculate CGT before repaying the BTL mortgage to the mortgage lender?
i.e., say the inheritance value was originally £400k, a BTL mortgage for £200k is taken out now, then the house is sold say in 3 years at £600k, CGT would still be chargeable on the £200k (£600k-£400k) that would go to the mortgage lender?

user1977

K_To said:

i.e., is buying the ex out now with a BTL mortgage a way of reducing capital gains liability in a few years as I will have effectively relinquished that proportion of the property?

You're not relinquishing a proportion of the property, you're just using it as security for a loan. The mortgage isn't relevant.

K_To

user1977 said:

K_To said:

i.e., is buying the ex out now with a BTL mortgage a way of reducing capital gains liability in a few years as I will have effectively relinquished that proportion of the property?

You're not relinquishing a proportion of the property, you're just using it as security for a loan. The mortgage isn't relevant.

OK, thanks for this.

sheramber

K_To said:

sheramber said:

No, CGT is based on the gain you have made in the value between the value when you inherited and the price you sell it for , less allowable expenses such selling fees. 

Mortgage interest  ( no capital repayment ) can be claimed as a credit at 20%   against your  rental income. 
You have been declaring your rental profit to HMRC? 

I've been declaring the rental profit throughout.

So, to be clear, for CGT purposes, the full sale value of the house would be used to calculate CGT before repaying the BTL mortgage to the mortgage lender?
i.e., say the inheritance value was originally £400k, a BTL mortgage for £200k is taken out now, then the house is sold say in 3 years at £600k, CGT would still be chargeable on the £200k (£600k-£400k) that would go to the mortgage lender?

Repaying the outstanding mortgage is not an allowable expense. 

Estate agent fees and solicitor fees would be. 

Hoenir

The interest on the BTL mortgage would not be an allowable expense against rental income. As the equity being released is not being used for a qualifying purpose. 

Bookworm105

Hoenir said:

The interest on the BTL mortgage would not be an allowable expense against rental income. As the equity being released is not being used for a qualifying purpose. 

why do you say that?
BIM45700 - Specific deductions - interest: Withdrawal of capital from a business - HMRC internal manual - GOV.UK