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bigduckontax
bigduckontax, Accountant
Category: Tax
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We want to buy our sons apartment off him as he is moving

Customer Question

We want to buy our son's apartment off him as he is moving and we eventually would like to move in ourselves but for the next few years we would rent it out. We currently own outright our own home, valued probably at around £225,000. The apartment will cost £100,000. My first question is what are our tax liabilities while renting (it would be my only source of income) and long term what would happen when we sell our house and move into the apartment? Thank you.
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I'm Keith and happy to help you with your question.
When you acquire the apartment you can elect to which property you wish Private Residence Relief (PRR) to to apply. This will, presumably, be your current home so when you eventually sell it and move into the apartment you will incur no Capital Gains Tax (CGT) liability. Most people do not realise that whenever they dispose of their own home they expose themselves to CGT as in most cases PRR, given automatically, reduces the taxable gain to zero.
Whilst you rent out the apartment you will be liable to Income Tax (IT) on the net rentals received. You can offset these by the following expenses [Which data].
' The most common types of expenses you can deduct are:
Water rates, council tax, gas and electricity
Maintenance and repairs to the property (but not improvements)
contents insurance
Interest on a mortgage to buy the property
Costs of services, including the wages of gardeners and cleaners
Letting agents fees
Legal fees for lets of a year or less, or for renewing a lease of less than 50 years
Accountant’s fees
Rents, ground rents and service charges
Direct costs such as phone calls, stationery and advertising for new tenants
The expense should be incurred wholly and exclusively as a result of renting out your property.'
Be careful, if you are buying as Joint Owners with your spouse the rentals will be deemed to be split 50/50 so if one or other spouse is taxable then an IT liability will arise if rental share exceeds the Personal Allowance of 10K.
When you sell your home, I have already covered your position at the beginning of my answer. The apartment will then become your PPR and again you would be exposed to CGT on sale, but the rental period would introduce a complication. The final gain would be partly exposed to GGT. Work out the total ownership in months, ditto the rental, take the difference, deduct 18 [the last 18 months you are presumed to be in occupation even if you are not] and the newly calculated figure over the total ownership period is the proportion of the gain subject to CGT. You have an Annual Exempt Allowance of 11K to offset any gain and the remainder is taxable at 18% or 28% depending on your income including the gain in the year of sale. You will see that the longer you hold the property the lower the proportion becomes and will often negate CGT altogether. Simple, as the Mercat in the TC advert would say!
If you die before you sell then there is no CGT on death, all assets being rolled into a deceased's estate on demise and subject to Inheritance tax if over 325K plus charitable bequests at 40% flat rate on the surplus.
bigduckontax and other Tax Specialists are ready to help you
Expert:  bigduckontax replied 2 years ago.
Thank you for your support.

One tiny amendment to my answer paragraph 5 line 6 delete 'TU, insert 'TV.'

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