Property and Tax Issues

Isis' Maggie Fleming answers readers questions in Saturday's Daily Telegraph newspaper for the Property Clinic section.

The questions and answers are reproduced for you here.

This page contains Questions & Answers from July 2003. Older articles are accessed through our main Property Tax page.

There is a wealth of information on these pages. If you have a specific interest, please use our Search facility.

I own a two-bedroom flat and my discounted mortgage deal is due to finish in September. I am looking around for a new deal as I do not have any redemption clauses and am tempted to take out one of the long, five-year offers. However, there is a possibility that I might be moving abroad in a year or two and, if this happens, the flat would be rented. Would I have to tell the mortgage company about this and take out a new buy-to-let mortgage and pay redemption penalties or would most lenders be sympathetic to a change in circumstances and simply work around it? Should I mention the possibility of my move when I discuss new mortgages with lenders?

Maggie Fleming writes:

The five-year deals are likely to carry high penalties for early redemption. Do you really want to tie yourself in for an extended period when you are not sure where you will be living in a few years' time? You may be better with a two- or three-year variable discounted rate deal without penalties. This would give you flexibility so that, if you do go abroad, you have the choice of staying with your existing lender or looking for a good buy-to-let deal at that time.

Many lenders will be sympathetic if you are moving abroad, especially if the move is work-related. Sound them out as to their attitude before you sign up. Some may be prepared to honour your discounted deal if you leave the country; others will put you on to their standard variable rate as soon as you go. Furthermore, if you are still abroad when your new deal comes to an end, you will probably be unable to set up a new discounted deal as a non-resident and are likely to have to stick with your existing lender's standard variable rate. So be careful at the outset to choose a lender which has a competitive standard variable rate.

If you do move abroad, you will need to tell your buildings insurer. There are also tax implications. Ask your tax inspector about obtaining Revenue approval to receive rents with no tax deducted.

My elderly in-laws reside in a former council-owned property in North Wales, which they purchased several years ago. Their only child, my late husband, died 13 years ago. Consequently, my three teenage daughters are their closest living relatives. On their death, my in-laws are planning to leave their property to my daughters, currently all aged under 21. What is the most tax-efficient way to do this? My in-laws recognise that their granddaughters would wish to dispose of the property at the earliest opportunity, the current value of which would be £50,000 or less.

Maggie Fleming writes:

I would like to know more about your in-laws' total wealth. Assuming that the property is their only major asset, there will be no inheritance tax liability on either death and there is no need for tax planning on their part. Your daughters would inherit the property at probate value on the second death and, if they sold the property soon after, they would not have a capital gains tax liability either. Even if they delayed selling it and the property rose in value, it would have to increase very considerably before any gain would become chargeable, because each of your daughters would be entitled to set the annual exemption (currently £7,900) against her share of any gain.

If your daughters are under 18 when the last surviving in-law dies, the law will impose a trust. If the property is left by will as a "vested" gift, the trustees, on selling it, will be able to make use of each child's annual exemption - the end result for taxation will therefore be exactly the same as if the children had owned the property outright.

All in all, I see no tax liability arising either for your in-laws' estate or for your children.

I live in a house owned by my son. I am currently building my own home to live in. How long must I live in this house before I can sell it without paying capital gains tax? I do own other property, but this is let out long-term.

Maggie Fleming writes:

There is no minimum period of residence laid down in the legislation but there have been one or two legal cases which have touched on the subject. Generally speaking, it is a matter of quality, not quantity - not "how long did you live there?" but "was it your home?" It is your intention when you occupy the property that is all-important.

The relief is available where the property in question is your only or main residence and the word "residence" implies a degree of permanence and an intention to make it your home. Your occupation of the property should therefore not be a temporary, stop-gap measure.

Nonetheless, if your occupation of the property is very brief, the inspector may suggest that your intention all along was not so much to make a home as to make a tax-free gain and, while it is difficult for the Revenue to disprove anyone's stated motive, it would have a good case if you do sell it on quickly.

Another danger is that instead of seeking to charge you to capital gains tax, the Revenue could argue that you are liable to income tax on the grounds that the construction and sale of the house is an "adventure in the nature of trade".

If you are thinking of moving on quickly, you should consult a tax practitioner, especially if you have a professional connection with building or the property business or have a history of similar transactions.