tax on private mortgage

[holly247]

My ex-wife inherited a property which our son has been renting off her for 3 years.Our son is now in a position where he wishes to buy the property. My ex is willing to give him a private mortgage to enable this . Her solicitor has worried her today by saying she will have to pay tax on this and needs to see an accountant. Surely the repayments to her would be counted as unearned income ? This is the only property she owns . Also, would she be liable for any tax on the sale ?

[ubasses]

If she is giving him the money to buy the house off her, there may be capital gains tax to pay on the increase price since inheritance until sale. She would also have to pay tax on any interest he pays her on the mortgage, as this would be income. If he is only paying back the loan interest free there is no income to pay tax on.

[holly247]

Thank you Ubasses . My ex owns this property outright . She is willing to sell it to my son at £200,000 , the market value is about £225,000.It was valued for probate 4 years ago at £230000 .She is willing to give him a private mortgage ( loan? ) at 3% repaying the £200,000 . He would be paying both interest and payments reducing the loan. My ex,s only income is the present rent from my son and income from shares . As i understand the situation at the moment she does not pay tax. Would her personal tax allowance help her if she is taxed on the mortgage interest payments ? Thanks for your input ,as you see i am a bit out of my comfort zone here !

[bednobs]

the solicitor was probably referring to CGT.

[Skyline D]

There clearly is no capital gain from what you say. Bednobs is probably correct in that this is what the solictor was hinting at.

There is however an income source from the interest on the repayments. So she'll need to do a tax return to determine whether or not there is any tax to pay. Whether she needs an accountant to do a tax return is a moot point. She presumably already does a tax return if all her income is from shares and rent so if she does it already herself it won't be any more complicated to continue doing so. If she has an accountant to do it give him the info regarding the mortgage repayments and let him carry on with it. It's entirely straightforward.

[1eyedjack]

Although there is clearly no CGT on this transaction, and probably not on later sale by the son, by reason of PPR exemption, there is a point of minor interest regarding CGT: CGT is calculated on "arms length" open market values. Where the parties are unrelated there would be a presumption that the price paid is the open market value. Where the parties are related there is no such presumption. For CGT purposes it would appear on the facts stated that the deemed proceeds of disposal would be £225K. This might be relevant in the future if the seller wished to use the resulting loss (of £5K rather than £30K) against some other CGT gain. The seller also appears to have made a £25K disposal out of her estate which would be regarded as a potentially exempt transfer for IHT purposes, for which she may need to keep records if say she were to die within 7 years of disposal.