Inherited Property and CGT

[ROBERTWBROWN]

Separate from the issue I just posted, I also inherited a property from my Great Aunt approx 2 years ago. It was in a poor state of repair and although it was been placed with an estate agent a sale was not achieved. It has now been renovated and the value has increased by approx 33%. I am considering renting the property but would like to understand the tax implications of both renting and selling so that I can proceed in the most tax-efficient manner. Kind thanks, Robert Brown.

[demetris]

Before renting the property out, make an election to nominate your current main residence as your private principal residence and soon afetrwards you lodge a variation election to nominate the new property as you PPR. When you sell the second property, make another election variation to nominate the first property as your PPR. This will ensure that the capital gain you make on the second property will be exempt for the last three years of ownership. Also, the gain will be further reduced by letting exemption. It would be more tax efficient to own the second property jointly with your wife to ensure further reducing the gain attributable to the letting period.

The rent will be taxable after deducting allowable expenses at income tax rates.

Demetris Savva BA FCCA
http://www.tax-accounting-london.info
constantinesavva@accamail.com

[Huw Williams]

You asked about the tax implications of renting and selling:

RENTING - the main tax issue is income tax which is charged on the owner or owners based on the excess of rental income over deductible expenses. If you have to incur the cost in running the property, it is probably deductible, but setup costs (furniture bought for the first time and all the renovation costs) are probably not deductible.

You can look at pages from the self-assessment return for land and property on the Inland Revenue website. The relevant self-assessment pages are labelled SA105 and there are notes to go with it which are a starting point. For the grey areas you need to ask a professional.

If the property is owned by a company, similar rules apply, but the tax is called corporation tax and is at very different rates from income tax.

SELLING - here the tax is called capital gains tax. The calculation starts by comparing what you sold the property for with what it cost you (including improvement costs). It is levied as if it were the top slice of your income (so at up to 40%), but there are a number of reliefs available such as an annual exemption (for individuals) and taper relief if you have owned the property for a number of years. Rules for companies are now very different (since 1998).

An important exemption for individuals is the principal private residence exemption which Demetris referred to. This is available to exempt a proportion of the gain arising on a property which you have occupied as your main residence.


Huw Williams
enquiries@huwwilliams.co.uk