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Inherited property, rental income and tax woes.

Started by PawsOfEvil, November 27, 2011, 04:29:55 PM

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PawsOfEvil

Last year my mother passed away leaving my brother and me a house in London. It took a few months to get everything sorted but the long and short of it is we own the house outright with no mortgage on it. I have been away with work and my brother began renting out the property. 100% profit sounds nice right?

Well the snag is I'm a higher rate tax payer and my brother is self employed. We each own 50% of the property so we should be splitting the income 50/50. If I take the rent I will have to pay 40% on it so currently we have an agreement that my brother will take 100% of the rent and I shall recieve a larger share of the property if we sell. I cant help feeling that with such a large asset we should be making something of it. The house is worth about £250k.

If I sell the house - the market isn't great at the min so I guess it could take some time - I could nearly pay off my mortgage saving thousands in interest. Alternatively I guess I could look at purchasing more properties.

If you were in my position what options would you look at?

Mr X

#1
You can do a lot with a £250k mortgage-free property depending on your attitude to risk.

How much is the house currently renting for?

If it was me (taking a very general view based on limited info of your situation), I would remortgage the house, leaving about 20-25% equity in the house and use the released funds (185-200k) as deposits for about 3-4 more houses with good rental yields.

You mentioned you are a high rate tax payer so I imagine you wouldn't have much trouble with mortgages.

If you sell it, not sure if it would incur capital gains tax as I think there is different rules for Inherited property, but either way,  I personally would avoid this but then again it depends on what you want out of it.

Jeremy

Hello Paws of Evil,

Mr X is right.  Fiddling around with money finance is no good if you don't know what to do with it.  I suggest you've got the cart before the horse.  Decide what you want from life, then see what this inheritance can do to help you achieve your goals.

Sorry this advice so far is not specific, but I've got no idea what you want: Regular income or lump sum.  But seeing how you're posting on a Landlord Forum, be aware your audience will be biased towards increasing your involvement in Landlording.

Some more specific comments...

Don't get into thinking your gross rental income is your 100% profit figure.  If you do that you'll neglect maintenance and your tenants will think you're a pants landlord.

Have you been to a proper accountant to check out the deal you've struck with your brother about how you're divvying up the income / capital growth?  It's all very well having a family agreement, but if it's not a recognised tax avoidance scheme, MHRC may well make up their own minds about how much income you're really earned on this property and tax you based on earning 50% of gross rental.

In your accounts, register up to £125k of your own mortgage as "general financing" to pay your share of the inhertied house.  Get tax releaf on the interest.  Accountant will sort that out for you on annual tax return.

I beleive (but am not certain) that now you've rented the house out, you'll be liable for CGT.

Jeremy