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BTL due inheritance

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YeeWo
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BTL due inheritance

#168604

Postby YeeWo » September 24th, 2018, 1:59 pm

Talking with a colleague who told me he was renting out an £800k property in London. As he'd inherited the property no mortgage needs paying. I'm not, and have no interest in being, a BTL Investor. From what he told me though, three things concerned me: -
1) The Monthly rent represented a very poor return on the NPV of the asset.
2) 40% Income Tax is being paid on the monthly rental received.
3) CGT and IHT taxes on this asset as-is would hypothetically be enormous.
Am I viewing this situation in any way incorrectly? If my colleague were to move into the property and live there for 6 months, am I correct in thinking he could consider the property his primary residence and sell CGT free? Am I being overly bearish? I clearly appreciate he is very much in the category of "rich mans problems" but would be really grateful for any constructive opinion!!

gryffron
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Re: BTL due inheritance

#168623

Postby gryffron » September 24th, 2018, 2:52 pm

1) Depends how you look at it. His actual acquisition price was 0. So any return is infinity %. The property will also (probably) accumulate in value, in addition to any rental payments. So the rent is not the entire return.
2) If he is a high rate taxpayer already, then yes. Any costs incurred by renting are allowable against this.
3) He, or rather the estate, should have settled IHT before he inherited. For CGT purposes, his acquisition of the property is assumed to be at market price on the date of the previous owner's death. When he sells, there will be CGT to pay on the gain since that date.

There is a CGT benefit in the property being your PPR. But you actually have to live there, not just nominate it. And the rules on how long you have to live there, and what part of the gain then becomes allowable are complicated. It's not as simple as "6 months PPR wipes out all previous gain". He should seek professional advice if he wishes to do this. Especially over this amount of money.

Gryff

PinkDalek
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Re: BTL due inheritance

#168637

Postby PinkDalek » September 24th, 2018, 3:27 pm

YeeWo wrote:… 3) CGT and IHT taxes on this asset as-is would hypothetically be enormous. ...


Unlikely to be both, based on current law.

If he holds until death, there is presently no CGT on decease so there's "only" IHT to consider and we don't know the value of his (or his spouse's if he has or will have one) current assets as a whole.

From what you've indicated, this is a residential property. There are proposed changes afoot, should he be thinking of selling in the future.

From April 2020, a payment on account of CGT may be due to be paid to HMRC when residential property is sold or otherwise disposed of (e.g. by giving it away). … The changes will mainly affect those disposing of a second home or rental property. They will not apply where the gains are not chargeable to CGT (for example where the gains are covered by private residence relief). from:

Consultation document Publication date: 11 April 2018
https://assets.publishing.service.gov.u ... cument.pdf

The applicable CGT rate on any gain would be 18% and 28% tax rates for individuals for residential property as per https://www.gov.uk/guidance/capital-gai ... allowances (subject to any future changes).

Gryff has already covered CGT Main or Only Residence Relief (aka PPR and PRR) but an initial study of this might provide some pointers:

https://www.gov.uk/government/publicati ... elief-2018

There's far, far, more detail on that in the HMRC internal Capital Gains Manual, including case law, from about here:

Capital Gains Manual: Reliefs: Private residence relief: contents
https://www.gov.uk/hmrc-internal-manual ... l/cg64200c

JonE
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Re: BTL due inheritance

#168658

Postby JonE » September 24th, 2018, 5:40 pm

gryffron wrote:1) Depends how you look at it.


Yes, indeed. What I used to do was, from time to time, consider the net realisable value of a property (after CGT) and relate the 'net profit' derived from rental income to that sum of cash-in-hand. I'd then consider what other investment opportunities were available for that same sum of net cash together with the nature and level of returns on each.

Other factors influencing a sell/retain (or mortgage) decision would include whether I was happy to have whatever proportion of my net worth that sum of cash represented invested in property, in residential property, in London residential property and, especially, in a single London residential property. Property tends to be a chunky investment: unless mortgaging to realise some cash it's pretty much 'all or nothing' as disposing of part of a property is rare. I wouldn't want to be in the position of needing to liquidate a property asset but being forced to sell my only letting asset when the market might be against me. I'd also bear in mind that a void of one month wipes out 100% of my rental income for the month if my let-property portfolio value were tied up in just one flat

Taking a punt on future value of a specific property is inherently risky. Some people have been known to sell-up in anticipation of a property price crash but found that events didn't pan out as they'd expected. Others have held on in the hope of continuing (unrealised) gains but then experienced a falling market.

The immediate effect on the IHT position of one's estate is mainly that the value being in the property means that the full amount is brought into the computation whereas having disposed of it means that CGT will have been assessed (subject to CGT reliefs and rates) so only the net realised value is in the estate (subject to IHT reliefs and rate). If the value is in the property then this may have an effect on when some IHT is payable.

If a property has at some time been one's residence this does not simply exempt the disposal from CGT in its entirety: as has been indicated pretty clearly, it can get a bit complicated and the rules have changed a bit over time (more so if your colleague is not tax-resident in the UK) so don't rely on simple web-searches which may turn up superseded info. A major complication could include whether HMRC accepts that the property properly qualified as one's principal private residence - that's not based solely on objective criteria so there are circumstances such that you only find out when HMRC takes a view after the disposal. They'll receive PPR nominations and so on without comment as there's no need for them to form a view until a taxable event such as a disposal has occurred. Good records that can support one's claim (with no loose ends lying around to undermine them) are worth maintaining.

Claims that a taxpayer had taken up residence a relatively short period before putting the property on the market have been tested and have failed in court as 'occupying as a residence' is regarded as requiring a degree of permanence and the view was taken that there was clearly insufficient intent to form a long-term residence in that case. Although Goodwin confirmed the principle in a case involving extreme circumstances, it has since been applied in less obviously outrageous circumstances such as, for example, Moore - where the taxpayer didn't get his ducks in a row and also shot himself in the foot. PPR claims look to be a high-reward target for HMRC so we might expect increasing levels of resistance to them in non-mundane circumstances.

It strikes me that professional advice on the current state of play would be worthwhile for your colleague. Investigating the tax position only after the event is dumb whereas time and money spent on reconnaissance is never wasted.

Cheers!

monabri
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Re: BTL due inheritance

#168671

Postby monabri » September 24th, 2018, 6:33 pm

The inherited property would have had to have gone through probate at which point it would have been assigned a value - this is the reference point.

When they come to sell it, the CGT would be calculated w.r.t. this reference.

(same answer as Gryff above)

It's a nice little windfall!


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