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bigduckontax
bigduckontax, Accountant
Category: Tax
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Experience:  FCCA FCMA CGMA ACIS
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Hi, a quick question on CGT and Inheritance tax solutions.

Customer Question

Hi, a quick question on CGT and Inheritance tax solutions. Basic facts:

1. Mother owns one house fully (House 1, which is mortgage-free) and has 10% beneficial interest in another (House 2, with outstanding mortgage), with the remainder of the house owned by my sister.
2. Both houses are let out, with the rent income used to pay off the mortgage of House 2.
3. Intentions are to gift House 1 to me and House 2 to my sister. Depending on their value and outstanding mortgage at the time of her death, there may be a potential inheritance tax liability, which we would obviously like to avoid if possible.
4. We are considering transferring the ownership of the houses now, in the hope that our mother would live for at least another 7 years, meaning it will become an exempt gift.
5. The issue we have now is what would happen with the rental income generated from these properties. Neither I nor my sister wish to receive any of that and we just want to continue using it to pay off the mortgage of House 2.
6. Questions: How would our tax liabilities be affected by this arrangement? Would the rent simply be offset against the mortgage and no tax would be payable? Would it count towards our own income and affect our overall tax liability? Is there a risk of apportioning the income to our mother in that this may result in her receiving benefits from the properties and affect the 7-year rule? In short – what is the best way to deal with this situation?

Thanks in advance.
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I'm Keith and happy to help you with your question.

Your position is relatively simple if we ignore the Potentially Exempt Transfer situation which you have already discounted.

The rentals you and your sister receive will be income in your individual Income Tax (IT) assessments. This will be offset by the interest element only of the mortgage repayments. In my experience there will be a shortfall and the interest will be below the income leaving a net sum still in your assessments liable to IT.

Sorry to have to rain on your parade. You could, I suppose lease the properties to your mother at a peppercorn rent and then letting her receive the rentals from the real tenants. I have a sneaking suspicion, however, that HMRC would view such an arrangement with a very jaundiced eye and consider it merely tax evasion.
Customer: replied 2 years ago.
Hi Keith, thanks for picking this up. Does it matter than the mortgage is only on one house and that we are using the proceeds from the other house for this? I presume we would simply split the interest-free mortgage 50/50 then deduct that from our respective rentals? Also how does such an additional income usually work in calculating tax liabilities when you are just receiving pay from your employer when they pay you through PAYE and make all necessary tax calculations themselves? Does it mean we need an accountant or do a self-assessment return? Thanks
Expert:  bigduckontax replied 2 years ago.
Yes, it does. It is only the mortgage interest payments on that one house which can be set against the rental income from that house in the tax assessment of the individual who owns the property.

You are now receiving rental income. This you must declare to HMRC by means of an annual self assessment return. You may, and I only say may, be able to get your tax office to reduce tax codes by the net rentals which would leave you tax neutral at the year end, but HMRC may not necessarily play ball, particularly if the rental income may fluctuate through the offsetting of say necessary repairs etc.
Customer: replied 2 years ago.
ok so as the house I will own will be mortgage free but the rental income will be used to pay off my sister's house, can these payments not be offset against anything? Does that mean I will need to declare and potentially be taxed on the full rental income, even if I am not receiving all of it and it is used to make mortgage payments, albeit on another house?

Thanks, XXXXX XXXXX of course rate as soon as we have finished.
Expert:  bigduckontax replied 2 years ago.
I regret not, the entire rental income will be assessed for IT. What you do with the rental income is entirely your own affair.

Sorry, you are not doing very well tax wise out of your current situation!
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 3105
Experience: FCCA FCMA CGMA ACIS
bigduckontax and other Tax Specialists are ready to help you
Customer: replied 2 years ago.
ah well at least I know where I stand, thanks for your help!
Expert:  bigduckontax replied 2 years ago.
Thank you for your support.

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