Inherited BTL- tax treatment?

[molinari]

My brother and I inherited a house that already had tenants in (assured tenancy), and we're wondering what we have to do with regards to paying tax. I live with my girlfriend in a flat that she owns, and my brother still lives at home with my parents so neither of us own another property. Both of us also work full time. The property was managed by a letting agency from the start of the year up until this month when we have taken back control. The rent paid by the tenants goes into a separate bank account, which neither of us use with the exception of paying for the yearly building insurance and agency commission.

Can someone please guide us in the right direction for sorting out how to calculate the tax we should pay etc…


- sorry about the title, forgot to change to something meaningful.

[Tax Accountant]

My brother and I inherited a house that already had tenants in (assured tenancy), and we're wondering what we have to do with regards to paying tax. I live with my girlfriend in a flat that she owns, and my brother still lives at home with my parents so neither of us own another property. Both of us also work full time. The property was managed by a letting agency from the start of the year up until this month when we have taken back control. The rent paid by the tenants goes into a separate bank account, which neither of us use with the exception of paying for the yearly building insurance and agency commission.

Can someone please guide us in the right direction for sorting out how to calculate the tax we should pay etc…


- sorry about the title, forgot to change to something meaningful.

This is effectively an investment property which has never been an only or main RESIDENCE for either of you.

You are deemed to have acquired the property at open market value at the date it was inherited by you. This is the value which would be used in the calculation of Capital Gains Tax if and when you sell the property. As it has never been the only or main residence for either of you at any time in your ownership, neither of you will be entitled to the extremely valuable Principal Private Residence (PPR) relief or the Lettings Relief or the last 3 years of ownership relief in the calculation of Capital Gains tax.

Coming to the position now, you are both deemed to be owners of half the undivided property with effect from the date you became entitled to the income therefrom. As such, you are each responsible for registering your lettings business with the H M Revenue & Customs office by contacting your nearest tax office. There are time limits for doing this. As you have been entitled to receive the rents since at least January 2005, you will have to prepare rental income accounts from the date of inheriting the property upto 5 April 2005.

You need to add the gross rents and deduct all allowable expenses, eg, insurance, repairs, agents fees, furnishings wear & tear allowance (if furnished), loan interest (if there is a loan secured on the property) etc. All figures will be divided half and half between the two of you and each persons half share will be declared in your respective self-assessment tax returns. It is irrelevant that all rental income is accumulated in a separate account or spent.

The tax office will send a self-assessment tax return covering the year 6 April 2004 to 5 April 2005. This will need to be completed and submitted by 31 January 2006 at the latest. You will also need to calculate the tax due and pay this by the same date, ie 31 January 2006. If you submit the tax return earlier than the latest due date, the tax office may (but not guaranteed) get around to processing your tax return and notifying the tax due before the due date of payment. Otherwise, you have to learn to do this by yourself or pay an accountant to do this for you. There are automatic penalties for delay in submitting your tax returns and also for paying tax late.

The tax charge on net profit will depend on each partner's other income. The rental profits will be added to each person's other taxable income and taxed at the rate applicable to the tax band it falls into, eg, 10%, 22%, 40% or a combination of these.

I hope this reply has been useful.

Ramnik

[Raggy]

If you submit your tax return online (www.hmrc.gov.uk/home.htm) then the tax is calculated for you. Don't leave it until the last minute though as the set-up process can take several days.

[Tax Accountant]

If you submit your tax return by 30 September following the end of the tax year, tax office will guarantee to let you have your tax calculations in good time before the due date for payment of tax, 31 January following the end of the tax year.

Of course this is already too late for you for the tax year 2004-05 as we have already passed the 30 September time limit.

Ramnik