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Sam
Sam, Accountant
Category: Tax
Satisfied Customers: 13919
Experience:  26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
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I am looking to invest in a buy to let property, funded by

Customer Question

I am looking to invest in a buy to let property, funded by my partner (we're unmarried, middle aged and both working) buying me out of the property we cohabit and together own outright as Joint Tenants. (I would be buying cash and would not have a mortgage.) We would continue to live in our current property and I would hope to receive income from letting the new property as a holiday let.
I'm wondering what the capital gains, income and inheritance tax implications of this would be.
We both have wills which name each other as sole beneficiary.
For example, would it make sense for my partner to buy me out completely so that we own separate properties (though I'd continue to live in our present house with him)? Or would it make more sense for me to retain a small stake in our present house (his contribution to paying off the mortgage has been far greater than mine) as Tenants in Common? If so, could/should I nominate the investment property as my primary residence (even though I would not be living in it)?
If I no longer owned, or only owned a small share, of our present property, in the event of his death, presumably I would have to sell the house to pay his inheritance tax? (The property is currently valued at £1.75m.)
I'm just trying to get an idea of whether him buying me out so I can invest in another property is a workable idea.
Many thanks, XXXXX XXXXX
Submitted: 3 years ago.
Category: Tax
Expert:  Sam replied 3 years ago.
Hi Kate


Thanks for your question, my name is XXXXX XXXXX I am one of the UK tax experts here on Just Answer.

Lets look at the facts, on the basis that the buy to let investment would be in your name only, and you currently jointly own the property that you live in, and are unmarried.

Lets look at the investment property first

You will not be able to elect this buy to let as your main residence, as you will not live inn it, so cannot make that election.

But if at any time in the future it becomes your main residence, then the time you live there will be treated as your main residence, which will lessen any future capital gain position

First any rents that arise will be liable to tax and you will declare this income (and the allowable expenses) to HMRC via self assessment each year, and when and if, you come to sell, if this had in fact become, or had been, your main residence during any period of ownership, then the time you lived there, plus up to the last 18 months of ownership (this is currently 36 months, but this is due to change to 18 months as from 06/04/2014 and is awarded when a sale takes place AFTER the date it has ceased to be a main residence) will be considered as exempt.

But also note, that a gain is treated as having accrued evenly over the whole period of ownership, so lets say you owned the property for 10 years, and lived there for 2 years during year 7 and 8, then those 2 years, plus the last 18 months of ownership - so a total of 42 months/total ownership of 120 months would be applied against the gain, to establish what amount is exempt under the private residence relief rules.
PLUS if this has been your main residence AND you have also let this out to tenants during the rest of the ownership period, then you ALSO qualify for private lettings relief, which can allow up to a further £40,000 of exemption on the gain,
Then you also have the annual exemption allowance, which for this tax year allows the first £10,900 as exempt, and from 06/04/2014 increases to £11,100.
So that's the capital gain position.

As far as Inheritance tax is concerned, if you still own this property at the time of your death, then the value of this property will be added to your estate (which will consist of any other property. or share of property and assets, or any money held by you) and any amount over £325,000 will be charged at 40% Inheritance tax.

Now lets look at the main residence.
As things stand, any transfer that you make to your partner will NOT attract capital gains tax - as this is your main residence, so any gain at the time of transfer on your half share will be covered by private residence relief. However if you make this transfer, then if your partner were to pass away first then the whole value of the property plus any other assets or property or money, that exceeds the £325,000 threshold will be subject to 40% Inheritance tax.

As there is no benefit in transferring the whole share of the home to your partner and having the investment property in your sole name, it would seem (at face value) prudent to remain half share owners of both properties, as this spreads the load of the tax due on rental income, protects each of your half shares of your home, and your investment in this but to let, and also with the investment property allows 2 lots of annual exemption allowance, and if this becomes both of your main residences at any time during the ownership period, would also allow you 2 sets of lettings relief, so this would be more cost effective.

This is an initial run down on how things are, and my professional advise, but do feel free to ask any follow up questions on the information provided.

Thanks

Sam

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Customer: replied 3 years ago.

Thanks very much, Sam, that's a great help.


One other thing I meant to check on: if my partner did buy me out of our current property, would the amount he gives me for my share be subject to Stamp Duty? That's the impression I got. (But Stamp Duty just on the amount he gives me, NOT the whole value of the property?)


I must admit I was hoping to be sole owner of the investment property but it doesn't sound like it's the most efficient way of doing it.


Thanks again,


Kate

Expert:  Sam replied 3 years ago.
Hi Kate

You are very welcome - and thanks for your response and further question

Yes - stamp duty will be a consideration - and the value used will be the amount of cash paid for the half share plus half the outstanding mortgage

The rate and thresholds are as follows

Residential land or property SDLT rates and thresholds
Purchase price/lease premium or transfer value


SDLT rate



Up to £125,000 Zero


Over £125,000 to £250,000 1%


Over £250,000 to £500,000 3%


Over £500,000 to £1 million 4%


Over £1 million to £2 million 5%

Over £2 million from 22 March 2012 7%
Over £2 million (purchased by certain persons including corporate bodies) from 21 March 2012 15%


Thanks

Sam