Retirement Flat Purchase, Renting current home and CGT

cdbhel · 9 April 2018 at 8:28AM

Apologies if this should be posted elsewhere or has been covered previously but I cannot find anything. I really hope someone can just help with this for my elderly parents.

My parents are in the process of purchasing a retirement flat in an Extracare Retirement Village development. This is an outright purchase and based on the fact that there is onsite care assistance etc going forward. My mother is in her 90s and visually impaired so entitled to disabled parking pass etc (not sure this means she is registered as disabled) and my father in his 80s and receives carers allowance for my mum. The option of remaning in their own home with extra support on-hand is a good option for them despite the costs and payments and has been considered carefully.

My father's question is this. He had intended to keep their current home which they have lived in since July 1986 and rent this out as this would mean that the income from that would cover the costs month on month of living in the retirement village. The retirement flat would be bought after selling stocks and shares ISAs.

However, we are not sure how this works out regarding Capital Gains Tax so am not sure whether they would be better to sell their current home to avoid paying too much tax on it as I assume they cannot keep that registered as their main residence. I have read that the final 18 months of ownership of a property does not count for capital gain costs anyway and this is 3 years if they have moved to residential/care home. Would a purchase of a flat in an extracare retirement village count as this so allowing them 3 years before they begin to incur CGT and are those allowances still correct please?

I believe my father's preference is to keep their current home and rent that out but if the CGT is prohibitive then he would think again. If my parents still own when they die, does the CGT change in any way as part of their estate? They purchased it in July 1986 for around 60K, have obviously improved and extended it (not sure whehter this counts in the numbers) and it is now worth around 460K. They have lived there since July 1986 to date.

Sorry there are so many questions but my Dad is really keen to do the best thing and I am not really able to advise so am hoping someone here can help him a bit.

Any help and advice would be gratefully received. Thank you.

Pixie5740 · 9 April 2018 at 10:03AM

If the property won't be sold until your parents die then CGT won't be an issue.

Do your parents have enough funds available to cover the costs of living in the retirement village should the rental property have a void or a non-paying tenant? What about money to pay for repairs and maintenance?

Does your father understand the legal responsibilities of being a landlord?

silvercar · 9 April 2018 at 10:09AM

As Pixie says, there is no CGT on death.

If your father sold up at some points after renting out then the gain would be mitigated in CGT terms by the length of time it was his home and the last 18 months of ownership. They would also have CGT allowances each and letting relief. So the CGT bill would only be a small portion of the gain, if that.

cdbhel · 9 April 2018 at 10:13AM

Thank you. I suppose his intention is to keep the property until they both die. If this were not the case would it be 18 months or 3 years that doesn't count on the gain, do you know? I read something about 3 years if going into a care home etc, not sure this counts.

Yes, my father should be able to cover voids and both my brothers have rental properties so can assist him with the responsibilities etc.

Thank you for your answers so far.

silvercar · 9 April 2018 at 10:37AM

With 30+ years of the home being his PPR and letting relief, he would have to rent out for a very long time to get a big tax bill.

Letting out for 10 years would mean that still three quarters of the gain would be exempt, plus letting relief worth upto 40k plus CGT allowance of 11.3k (each if both alive at sale time).

Tom99 · 10 April 2018 at 1:25AM

Its the father in his 80's managing a BTL, and his old home at that, what if the tenants do not respect your parents property - or will you do all the management for them?

G_M · 10 April 2018 at 4:45AM

cdbhel wrote: »

AMy parents are in the process of purchasing a retirement flat in an Extracare Retirement Village development. This is an outright purchase
........

I know this is not your question, but since you mentioned it....: by 'outright purchase' do you mean no mortgage? Or do you mean to fully own?

I ask because many of these places are leasehold, often with very restrictive re-sale options (eg back to the Village company) on disadvantageous terms. This may not be relevant, or matter to them - I just raise it in case.

As others have said, no CGT on death. Though Inheritance Tax would apply.

Another consideration is if one or both parent's health deteriorated to the point a care home was required. A sale might then be needed tto fund this.

There are significant responsibilities with renting, and using a letting agent is not a guarantee of things going smoothly. Any major issues (damage, non-payment of rent, legal oversights etc) can be very stressful. See

* New landlords: advice, information & links

* Letting agents: how should a landlord select or sack?
Selling now, and then carefully investing the money for income might be an aternative option. Or buying an anuity which would provide a guaranteed income.

Maybe speak to a financial advisor.

AdrianC · 10 April 2018 at 8:12AM

Tom99 wrote: »

Its the father in his 80's managing a BTL, and his old home at that, what if the tenants do not respect your parents property - or will you do all the management for them?

^ This.

He's in his 80s. He has heavy carer responsibilities for his even more elderly wife, who's in poor health.

Why on earth does he need to be starting a new business now?

Even ignoring the emotional ties, which make letting your own long-term home a terrible idea at the best of times, is the house actually in a rentable condition? Long term ownership, especially if adaptations have been made for elderly and less-than-mobile occupants, rarely makes for instant lettability.
Would it be a suitable property, if one were looking for a BtL investment?

So we're looking at a property that may well swallow a year or more's income simply before it starts to make any return, let alone a viable one after management fees.

Nah, this is not a good plan for their circumstances.

Sell the old house. Use the proceeds to pay for the care. Perhaps use the proceeds to buy some kind of annuity/bond to cover the care costs, if one can be found at a tempting price - they're basically a gamble on outliving expectations.

AnotherJoe · 10 April 2018 at 8:41AM

I had similar thoughts about the inadvisability of a 90 year old with carer responsibilities being a landlord, however if the brothers with LL experience take over the admin side of things, and being hard hearted about this, is there a big tax advantage to the estate if it contains what was the family home rather than a big chunk of money ? Can the allowances for a house be passed on and used ? Or, does it not matter since they will have a second property that is now their main residence ?

cdbhel · 14 April 2018 at 9:07AM

Although in his 80s my father is very astute mentally and continues to provide financial administration for my brother's business. The house has been valued for both sale and rental and is deemed to be in excellent order (with no elderly modifications) with an estimated rental per month of around £1400 so this makes this actually seem an attractive proposition and one that he is able to administer himself comfortably. Should that change then we have POA so would be in a position to step up at any time.

getmore4less · 14 April 2018 at 12:13PM

£1,400pm on a £460k house, gross yield 3.65%

That's in the not very good range

PLEASE READ BEFORE POSTING

Retirement Flat Purchase, Renting current home and CGT

Comments

Categories

Get our FREE Weekly email full of deals & guides - and it’s spam-free