May questions and answers
Newsletter issue - May 2018.
Q. I own a rental property, which has a mortgage on it. The mortgage is currently on an interest-only basis. Given the new interest relief restrictions on landlords' finance costs, should I consider switching to a repayment mortgage?
A. The new rules restricting the amount of interest relief landlords can claim against rental income are being phased in over a three-year period between 2017/18 and 2019/20. Broadly, under the new regime, landlords will no longer be able to deduct all their finance costs from their gross property income before calculating their tax liability. Instead, they will have to work out their tax liability (without any deduction for finance costs) and then deduct an amount from their tax liability equal to 20% of their finance costs. In short, this means that from the tax year 2020/21, all financing costs will be restricted to basic rate only.
It will nearly always be beneficial to pay off a mortgage debt as quickly as possible. However, the new rules will largely (but not exclusively) affect those with gross rental income (after deducting allowable expenses apart from interest) exceeding the basic rate tax threshold. If you are liable to higher rate tax and you have a spouse or civil partner who pays a lower rate of tax than you, you may wish to consider transferring part of the property to them, so that they receive some of the rental income.
Q. My grandmother died on 3 May 2017. Her estate on death includes 12,000 ordinary shares in XYZ plc, a company listed on the London stock Exchange. The closing prices at the date of her death showed a bid price of 989p per share and an offer price of 993p per share at the end of that day. Recorded bargains on that date were listed as 970p, 980p, 983p, 989p, 993p, and 996p. How is the value of the shareholding calculated for inheritance tax purposes?
A. For IHT valuations (and for capital gains tax valuations prior to 6 April 2015), the lower of the following two figures is normally used:
1) The 'quarter-up' method, i.e. the lower closing Stock Exchange price plus one-quarter of the difference between the lower and higher closing prices (this can normally be obtained, for example, from a Financial Times or similar periodical for the day following the valuation date).
So, in relation to your grandmother's shares, the value per share is calculated as 989 + (1/4 x (993 - 989) = 990p, and the value of the shares is therefore £118,800 (12,000 shares x £9.90).
2) Mid-price between the highest and lowest recorded bargains for the day of valuation. This is sometimes referred to as the 'mid-price bargain' or 'average bargain' rule. In this case, recorded sale bargains were 970p, 980p, 983p, 989p, 993p, and 996p. The valuation is therefore (970 + 996)/2 = 983p.
The value of the shares for IHT purposes is therefore reduced to £117,960 (i.e. 12,000 shares x £9.83).
Q. I am thinking of buying a property in England to rent out. Will I be able to offset the legal fees, stamp duty land tax, and deposit costs against the rental income I hope to receive?
A. The three items you mention relate to the actual purchase of the property, rather than to renting it out. The costs are considered as 'capital expenditure' and cannot be claimed on your first tax return for the rental property to offset against rental income. However, do keep a note of these costs, because you will be able to claim for them for capital gains tax purposes, if and when you eventually come to sell the property. HMRC's Capital Gains Tax Manual provides further information on allowable expenditure.
