Six years ago due to a situation which led to a dispute with an aggressive neighbour my husband and I became what is broadly termed as ‘accidental landlords’.
An argument arose over a shared drive, as our neighbor thought that he could park where he chose thus blocking a turning point – this led to one of his extended family threatening my wife.
This escalated and the police were called on a number of occasions. After consideration we decided that the situation was untenable and considering our ages, (we are now in our seventies), we moved out and now rent a property ourselves and let out the house to tenants to cover our rental costs.
We submit self-assessment each year and pay tax on the rental income, although realistically there is no profit to ourselves as we pay as much to rent a property as we receive in income from the house that we rent out.
The couple were forced to leave their home after a parking row led to threats of violence (stock image)
To save on management fees we manage the property ourselves.
We are considering selling the property when the market improves, but if we continue to let the property to tenants we are concerned that this would not be considered our main residence for inheritance tax purposes.
Also, if we sell our property are we liable for capital gains tax and if we continue to rent it out what are the inheritance tax implications? Will this still be regarded as our main residence?
The house is valued at approx £475,000, and was valued at approximately £375,000 when we moved out.
– A This is Money reader, who wished to remain anonymous
Tom Foster, tax director at Lewis Brownlee Chartered Accountants said: In terms of Inheritance Tax there is hopefully some good news.
The main form of relief from IHT is known as the nil rate band. Each individual is entitled to a nil rate band of £325,000, an amount that has been frozen for more than ten years now.
In April 2017, the government introduced an additional IHT relief, known as the main residence nil rate band, which is presently worth £150,000 per individual. This now means many married couples will not have to worry about IHT if the value of their combined estate does not exceed £950,000.
Tom Foster, of Lewis Brownlee Chartered Accountants
In order to secure entitlement to the main residence nil rate band three key conditions have to be satisfied; firstly there needs to be a qualifying residential interest, secondly the property must be closely inherited (left to direct descendants) and thirdly in order to qualify for full entitlement the value of the individual’s estate should not exceed £2million.
Most importantly in terms of this particular query, a qualifying residential interest includes a property that at some point during ownership was occupied as a residence by the individual concerned.
Therefore if you continue to rent out your house, your house should be entitled to the main residence nil rate band as long as the other conditions are also met.
The rules also provide a degree of flexibility, and as such entitlement to the relief can be preserved if a home is sold, as long as any sale proceeds remaining at the time of death are still left to lineal descendants, that is children or grandchildren.
What about capital gains tax?
There is also a main residence relief that is designed to ensure homeowners do not have to pay any capital gains tax when they sell a property that has always been their home.
Some leeway is presently provided in that no CGT will be incurred if a property is sold within 18 months of the owner moving out although this is being reduced to just nine months from April 2020.
Further relief is available in respect of periods of time during which the property is let out, by way of lettings relief, which can further reduce gains by up to £40,000 per person.
From April 2020 lettings relief will no longer be available in respect of periods during which the owner has not also occupied the property.
In summary, you will be exposed to CGT charges if you decide to sell your house even though it is your only property.
This position could be improved if you were able to resolve or overlook the feud with the neighbour and move back into the property, even if it were only for a relatively short period while you look to sell it.
The main benefit to this action would be securing a further three years of deemed occupation, which covers periods of absence during which time the property owners do not benefit from main residence relief elsewhere, and as long as the property was used as the owner’s residence both before and after the period of absence.
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