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My partner owns an ex-council flat in London which we have had no luck in selling. We are considering renting it out privately via an estate agent or leasing it to our local housing association, which is offering just over £1,200 per month and wishes to enter into a three- or five-year agreement with us.
This is the only property either of us own, but we are considering buying a house together in the next 12 months. The mortgage payments are about £1,100 a month, with interest locked in at 1.6 per cent until November 2024. Will tax be due on the rental income? If so, how much? Also, could capital gains tax be due if we sell at the end of the lease?
Jeffrey Webber, tax director at accountancy and business advisory firm BDO, says selling the flat before you move would be more cost effective for you both and involve far fewer tax issues, so it might be worth taking this into account.
If your only option is to let out the flat, your partner would have to pay income tax on any rental profits for every tax year and must report any rental profits on their tax return by January 31 following the end of every tax year.
The income tax rate applying to the rental profits will be 20, 40 or 45 per cent depending on whether your partner is a basic, higher or additional rate taxpayer. Mortgage interest is not deductible in calculating rental profit, but your partner will obtain income tax relief at the basic rate of income tax (20 per cent) on the 1.6 per cent yearly mortgage interest payments paid in relation to the mortgage. After paying the income tax liability on the rental profits, your partner’s post-tax income from renting out the property will be less than the monthly mortgage payments of £1,100.
If you jointly purchased another dwelling (worth at least £40,000) before the flat is sold, both of you would be liable to an extra 3 per cent additional dwelling surcharge on the standard stamp duty land tax (SDLT) rates charged on purchase. This surcharge could be refunded on a later claim if the ex-council flat is sold within 36 months of purchasing your new dwelling. Signing a three-year rental agreement with the housing association would almost certainly mean you could not get an SDLT refund. If possible, buying property in your sole name would avoid the SDLT surcharge.
If you both reside in the newly purchased property the new property will become your main home for capital gains tax (CGT) purposes and the flat will cease to be your partner’s main home. Therefore, your partner may be liable for CGT on a proportion of gain made on the sale of the flat following the end of the three or five-year lease contract. The proportion of the gain that is taxable will depend on how long they owned it.
Once the taxable part of the gain is established, it may be that your partner’s annual capital gains exemption (currently £12,300) will cover the gain completely. If not, the CGT rate applicable to any excess gain will be 18 or 28 per cent depending on whether your partner is a basic rate or higher/additional rate income taxpayer at that time.
Should I buy my daughter’s student property or gift her the money?
My daughter is starting at university soon and I want to buy a student property for her to live in, which could become a long-term investment for her. Should I buy it in my name or give her the money to buy it?
Anthony Whatling, tax partner at Smith & Williamson, says there are a number of tax implications to consider, but the most important factor may be whether you are comfortable making an outright gift to your daughter.
If you do so, she would have responsibility for the property’s upkeep, dealing with tenants and agents and her own tax obligations. On the other hand, she would receive any rental income and ultimately could sell the property if she so wished. Assuming you and your daughter are both comfortable with this, it may be more tax efficient for you to consider gifting funds to your daughter so she can buy the property.
If you were to buy the property, and assuming you already own at least one other property, the purchase would be subject to a 3 per cent tax surcharge payable on additional properties in England and Northern Ireland, or 4 per cent in Scotland and Wales. This would not apply if your daughter bought the property herself, assuming it is her first property.
If your daughter has no other sources of income, there may be very little income tax to pay in respect of the rental income if she owns the property. This is because the first £12,570 of income received this tax year is not subject to tax. If you own the property, however, any rental profit would be taxable at your marginal rate of tax.
There may also be a capital gains tax charge if you buy the property and transfer it to her at a later date. Even though it would be a gift, you would be deemed to have received market value for the property for capital gains tax purposes. This means there could be a tax liability if the market value increased above the purchase price. The top rate of capital gains tax for residential property is currently 28 per cent.
Finally, any gift has potential inheritance tax implications if you were to pass away within seven years of making that gift. Making a cash gift now would start a seven-year clock running. The tax treatment of a future gift would, however, depend on the tax rules at that time. Given the government’s need to balance the books following the pandemic, it is possible gifts could be taxed differently in the future.
The starting point should be a conversation between you and your daughter to consider whether she is ready for such a generous gift.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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