Buying house witha view to moving when older.

[Tingly]

Good Afternoon

I live in a property now which wont suit me probably in about 10 years time (should i live that long).
So my cunning plan was to buy a bungalow now, let it out, then eventually sell my current property.
Aside from all the headache, perils n pitfalls of letting , and the extra stamp duty etc, what would be the tax situation?

Would i have to pay some tax on sale of current property?
If i were to move into the bungalow and stay until my death, would i incur some kind of tax penalty?

Is my cunning plan actually cunning?

Thanks

[AGoodman]

It's fine, except you would have to pay the additional rate of SDLT for second homes, which has just increased to 5% (over the normal rate).

You'll still get full PPR (so no CGT) on your current home if you sell it when you move out. You wouldn't accrue full PPR on your bungalow so you could incur some CGT when you come to sell that, unless you die in situ in the bungalow. Assets held at death are subject to IHT but get a free uplift to market value for capital gains tax purposes - meaning your executors don't pay CGT if they sell at the probate value.

The overall IHT position should remain the same.

Overall, I wouldn't worry about the CGT on selling the bungalow, as 24% on the gain at that point would be far less important than you having a good quality of life. The only fly in the ointment is the sky high SDLT buying it now, which will depend on the values involved.

[Tingly]

Thankyou A Goodman. That was of great help.And I have been unable to get a clear answer from Googling so this is fantastic.


If I may impose on you with one further question,
Someone mentioned in passing (a neighbour) of buying it through a ltd company as could have the mortgage payments offset by the rent.Does this change anything tax wise again please?


Thankyou very much

[someone]

For property held outside of a company the mortgage interest (not capital) payments are not deductible against profit. However, you get a 20% tax credit instead. In almost all circumstances this means there's no tax difference for a basic rate taxpayer.

For property held inside of a company, the mortgage interest (also not capital) payments are deducted from turnover to calculate profits.

But there's a lot more complexity to holding property inside a company, from the overhead of managing all the legal requirements of companies, ATED, SDLT on putting a property into a company, corporation tax, dividends, and then there's how to extract the property from the company once you no longer want the ltd wrapper for some reason.

There are good reasons for holding property in a company, and there are bad reasons. Tax on mortgage interest is a bad reason.

[AGoodman]

Just to give you an example of the problems if you moved into the property while it was owned by a company:

- you would be treated as benefitting from the company, which is a benefit in kind and subject to income tax (and potentially NI depending on your age)
- if the property was worth £500k-£1m, the company would have to pay £4,450 of ATED per year (increasing with inflation).

Winding up the company would be a double disposal, as the company would pay corporation tax on any gain, and you would also make a gain on the shares, at 24% CGT. That's the best case, when you're treated as making a gain rather than receiving it as income.