Inheriting Rental Property

[sandy2000]

I came across an interesting query on this forum...

https://www.taxationweb.co.uk/forum/viewtopic.php?f=8&t=43858#3x2Jbfji5dU1dQoq.99

In case of inheriting a share in an on-going property business, wanted to understand if it is technically correct to include a share of the outstanding mortgage loan (as well as the encumbrance on the property, together giving a NIL value) on the deceased estate to be divided between the inheritors.
The inheritors' share in the business will be different if it were included compared to if it weren't.

Has any one got a view on this?

[someone]

I would assume you can.

Based on: I would assume you'd pay SDLT on the transfer from the estate to the beneficiaries when there's a mortgage involved.

BICBW

[sandy2000]

The query from the OP was regarding the relative share of inheritors, and not about transferring assets or the mortgage to beneficiaries.
Accepting that the mortgage remains with the other main borrower..

In this case for a property worth 940k and mortgage 140k giving a net of 800k; 50% share would be 400k and with 10% reduction the estate in question is worth 360K.
If the children get NRB of 325K then either their share in the property business as a whole is 325/940k = 34.6% or it is 325/800k = 40.6%
If there were no mortgage debt - a property worth 800k in a similar situation would give NRB of 325k a 34.6% share in the property.

So the question is: what is the correct base value that should be used to determine the relative share for the children's 325K out of the whole property?

[someone]

I'm unclear where the nil rate band comes in.

But, If I own a property valued at 900k and I owe you 300k then we might agree that you get a 1/3 share to clear the debt.

Ignoring things like risk, you don't care whether I have 900k or nothing secured on the building.

In practice, if I had 300k secured, you might take a half share plus a half share of the debt. But I'm not going to give you a half share without you taking on a share of the debt which is what your calculation seems to imply.

Of course, the taxman will want dfifferent amounts of SDLT depending on how much you buy but you are swapping one 300k asset for another 300k asset, possibly together with some asset and debt that nets to zero.

Or perhaps I've misunderstood again.

[sandy2000]

I was referring to the original post: the NRB bequeath to children in the will, and the other partner of property business is allowed to keep the mortgage by the bank on behalf of self and the beneficiaries of the deceased 50%

Father passed away with 50%share of investment properties = 470k and a 50% share of loan = 70K. The properties are jointly onwed with another relative. As per the Will the children inherit upto NRB in the property and the remainder goes to the mother.

The bank has allowed the loan to continue for the remainder of the term with the relative managing the loan as a whole.
Since the NRB is supposed to be 325K net of the loan, do the children get to own 325k share in the property with no obligation of the loan and mother gets 75K vlaue of the property and the 70K of the loan - giving a net of 5K?
OR based on net value of 400K do the children own 325k+57K of the propery and 57K of the loan and mother owns 75K+13K of the property and 13K of the loan?

Any advice will be greatly appreciated.

Thanks

[someone]

ISTM that the executors have to find someone to accept the 70k of debt in return for 70k of the asset or they have to repay the 70k of debt (either by selling (a share of) the asset or from other resources in the estate)

So: the children get 325/470.
the mother gets 75/470

Someone or more than one person, gets 70/470 in return for 70k of debt.

From an accounting PoV it makes zero difference who that someone is, the estate is losing nothing of value.

I would assume that if the mother and children can agree on who gets the 'worthless' share (and in what proportions) then the executors should do it that way. If nobody is willing to accept liability for the debt then the executors may be forced to sell the share in the estate. And if everybody wants the worthless share then ask a lawyer who has the right to it (but my guess would be the mother in the same way she (presumably) inherits everything else that has no value)

The children may have to pay higher rate SDLT if they take on a share of the mortgage.

[bd6759]

@sandy: The question was answered correctly 4 years ago. Why do you think the answer was wrong?

@someone: Why do you think SDLT would be payable? (Clue: Para 3A, Sch 3, FA2003)

[sandy2000]

@sandy: The question was answered correctly 4 years ago. Why do you think the answer was wrong?

@someone: Why do you think SDLT would be payable? (Clue: Para 3A, Sch 3, FA2003)

bd6759 Thanks for responding.
4 years ago most of the answers focused whether any IHT was payable or not .. and none that cleared the issue of relative share in the on-going business the specific query was where no mortgage gets transferred and no cash distribution is made to any of the beneficiaries so SDLT does not come in the picture.

[sandy2000]

Thank you for your considered response, "someone"

ISTM that the executors have to find someone to accept the 70k of debt in return for 70k of the asset or they have to repay the 70k of debt (either by selling (a share of) the asset or from other resources in the estate)

Given that if it is an ongoing rental business, and if the bank is satisfied to continue with the remaining borrower, the LTV is quite low, the existing borrower would automatically be assuming the whole debt from his / her share of the equity.

So: the children get 325/470.
the mother gets 75/470

Someone or more than one person, gets 70/470 in return for 70k of debt.

From an accounting PoV it makes zero difference who that someone is, the estate is losing nothing of value.

This seems a sensible way of doing it. But my question was that should it be divided as 325/400 and 75/400 ? and distribute the 70k debt to the two in the same ratio.

I would assume that if the mother and children can agree on who gets the 'worthless' share (and in what proportions) then the executors should do it that way. If nobody is willing to accept liability for the debt then the executors may be forced to sell the share in the estate. And if everybody wants the worthless share then ask a lawyer who has the right to it (but my guess would be the mother in the same way she (presumably) inherits everything else that has no value)

Not sure if mother would have any more right than the children, because if the mortgage share were 145K or higher, then mother would be getting o or even negative equity from the estate.
In any case who gets notional share of the indebted property would be of some significance because whoever gets the debt will get the right to "release" the underlying equity from the bank by paying off the loan from their share of the income. So even though it is worthless at the time of death, it represents a right to "redeem" valuable equity (most probably more valuable then the debt itself by the time it gets paid off)

The children may have to pay higher rate SDLT if they take on a share of the mortgage.

Not sure why SDLT will be involved - if mortgage in not transferring to anyone other than the original borrower.

Regards

[bd6759]

But my question was that should it be divided as 325/400 and 75/400 ? and distribute the 70k debt to the two in the same ratio.

I would agree with that.