Property And Tax Joint Tenancy and Inheritance Tax April 2009
Isis Financial Planners' Maggie Fleming answers reader's questions in Saturday's Daily Telegraph newspaper for the Property Clinic section.
There is a wealth of information on all aspects of property and tax from Capital Gains Tax and Inheritance Tax to other technical and challenging issues of this complex subject. This page shows the articles for April 2009. To browse the articles from a previous year, please visit the main Property and Tax page of this website.
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- Deducting Expenses From Investment Rental Property - 20 April 2009
- Joint Tenancy & Inhertiance Tax - 9 April 2009
Deducting Expenses From Investment Rental Property - 20 April 2009
In 2007 I used my savings to buy a plot of land on which I built a pair of semi-detached bungalows, borrowing about 90 per cent of the construction costs. I intended to sell one but the market collapsed so I have let it and continue to pay the interest on the loan. My architect has apportioned the build cost (and interest) to each section and I expected to be able to claim tax relief on the rental's portion of the loan. But my accountant advises that I cannot because it was not specifically taken out to buy the property. Is this right?
Maggie Fleming writes:
The rules used to be quite restrictive but were changed in 1995. Now, the criteria for claiming an expense are similar to those for any other business. Interest paid on a loan that is used "wholly and exclusively" for the purposes of your rental business is an allowable expense. As your architect has identified the proportion applicable to the let bungalow, I see no reason why you should not claim this as a deduction from rents. It is a business cost.
Landlords are generally unaware of how liberal the rules are. For example, let's assume you are moving house and decide to let your former home - a common situation these days. If it's worth £400,000, you can increase your existing mortgage up to that amount and claim all the interest against rental income. This will often result in no profit and thus no tax liability.
Or say you plan to buy an investment property but don't want to pay the interest on an expensive buy-to-let mortgage. You can increase the mortgage on your home, presuming you have the equity, and use that to buy the investment property.
You can still claim the interest on the additional borrowing as a deduction. Of course, you'd need to keep careful records and have a paper trail to show HM Revenue & Customs (if it were to ask) that the funds were used to buy a rental property.
Joint Tenancy & Inhertiance Tax - 9 April 2009
My wife died six years ago and my grown-up son and I have since got planning permission to build a house more suitable to our needs. Would being joint tenants, so that we'd both own all of the property, save my son from paying Inheritance Tax? All the available information seems to refer to ownership by spouses rather than people in other relationships. With the increasing number of offspring living with their parents, I would think this must be a common question.
Maggie Fleming writes:
Being joint tenants makes no difference to any Inheritance Tax liability; it simply means that the property passes outside the will to the other joint owner.
This area can be a minefield and I would need further information. What proportion of the building costs are you each paying? Or are you paying for everything? This will affect the IHT position. If your son is paying 50 per cent of the building costs, that share will belong to him from the outset and IHT will only be an issue on your share at your death.
As you intend to live in the house together, however, there is a little-known provision that could be of use. Section 102B(4) of the 1986 Finance Act states that the reservation of benefits rules will not apply where you gift a share of your property to someone who occupies it jointly with you and shares the outgoings proportionately.
So, if you gift your son a 50 per cent interest in the new house, it will be a potentially exempt transfer and will fall out of your estate after seven years. HMRC is not keen on gifts of more than 50 per cent but, in theory, there is no reason why you should not gift more.
There are other issues if you are contemplating a gift of a share of your home - the possibility of your son becoming bankrupt or getting divorced - so you should take legal advice.
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