I've inherited a significant amount of money. Invest, buy a house, spend some?

[VivaLeBeaver]

Have found out today I've inherited a third of an estate. Which is made up of cash and a small house.

House is worth approx 140k. If we sold the house, added that to the rest of the estate we'd each get about 120k.

My dilemma is that I've always thought it would be a good idea to have a rental property. So instead of taking "my share" of the money its crossed my mind to buy the house. So I'd have to get a mortgage for about 20k.

It's a 3 bed property in a nice area, nice town. I reckon it would rent for between £400-£500 a month. It's in very good condition.

Dh is very good at DIY so would be able to fix most house type problems if any arose obv we'd have to do gas certificates.

There's a risk of it not renting out or someone stopping paying rent.

The main benefit is that I currently work in a physical, front line nhs job. Am late 30s and won't get my pension till I'm 67. I don't think I can last till then and this could be a bit of an "early" pension for me. I could maybe move to a lower paid job or really cut my hours at 55 if I've got income from a house.

But 120k in the bank sounds quite good. I've currently got 10k savings and have it a unit trust which gives me £30 a month. So 10x that I'd get £300 a month income from 100k in the unit trust.

It would be nice to have a bit of cash to spend which I wouldn't have if I bought the house?? Though I suppose I could soon save a bit of the rental income if it rents out. I'd love to be able to pay for gym membership which currently is too much of a luxury. Plus I'd like a log burning stove! But don't want to make a daft decision over a log burner!

Nice problem to have :) think I would look into other rental opportunities rent prices are pretty stable across the country (apart from London obviously) so you could buy a house outright with that sort of money, finished and rent it for the same amount (if not a bit more) I would look around anyway

The advantage of this one is that I know it, I know its been well looked after. It's a lovely layout and location. Plus there won't be any estate agent fees. If we sell the house we lose 2% of it to estate agents.

Have you taken into account any inheritance tax you will have to pay?

I think in my situation id pay my own mortgage off rather than buy a rental, but out of your 2 choices id probably do the rental as a 30k mortgage shouldn't take long to pay off and then any rental income would be all yours after tax.

No, haven't taken into account inheritance tax. Total estate is approx 360k. So we have to pay 40% on 35k I think. So we lose about 20k. Or 7k each. So maybe i'll need a 25k mortgage??

Our home mortgage is only £200 a month, we've nearly paid it off.

Dh has some savings actually. He tends to keep his savings separate to mine but I suppose if I put it as a business proposition he may be interested.

Maybe I can get him to make the shortfall!

The way things are at the moment - I would buy the house and take a remortgage on my own house for the £20k. Then I would rent out the property for the going market value.

Not having a buy to let mortgage is cheaper and you would own the second property outright, make sure you invest int he property and keep receipt for every single item you buy for it, even if your dh is doing it himself you need to clock the hours of work done and he should account for it.

with any profit you make from the house you can put this away either on any outstanding mortgage you have on your property or if that is paid off then into a pension pot if you want to look long term

I am not sure. If it was me, I think I'd probably pay off my own home mortgage. Being mortgage free at such a young age massively frees up your options.

I'd then start looking at whether the balance could be put towards a rental property maybe with a higher mortgage.

Actually IvyKaty makes a good point, you could own the rental property outright instead.

Only problem is we've just fixed our remaining mortgage for 5 years. So don't think/know if we can add another 20k to it so soon. Won't I have to wait 5 years?

Viva - you need to ask the mortgage company if they would loan you another £20k and whether this could be included in your fixed rate for 5 years.

Ask how much it would cost to add the extra 20k and whether they would lend this to you

set against how much a buy to let mortgage would cost as you may find it cheaper to pay a penalty to get out of the 5 year fixed than take a buy to let mortgage

an alternative would be to ask your bank to loan you £20k as this again may be a cheaper option to have a loan than a buy to let - but you need to check out all the options first

Also will the other 2 parties sell you the house at the price it has been valued?

Have you factored in solicitors fees - you need to get one to deal with the house sale and you really should get a different one from the one that is dealing with the estate.

If it was me I would try very hard to keep the house as it would be worth much more to me that the £140k it is worth at present

Yes, the other two will sell.

We're not using a solicitor for the estate, doing it ourselves. One of the other executors has done this before and says its straightforward.

I will have to pay solicitors fees for the house sale I guess. Hopefully it should be very straightforward. Maybe a case of just transferring name on the deeds rather than a proper sale??

Will ask the mortgage company tomorrow.

I think you're right IvyKaty, I need to try and keep the house. Would be best long term.

Take a second mortgage on your existing house, if you have lots of equity then should be no problem with your existing lender.

The transfer of the other house would be very straightforward, no stamp duty to pay just a land registry fee. Solicitors fees should be around £250 plus VAT.

That sounds good.

Don't suppose you know if we'd have to pay capital gains tax. Dad bought it as his main property but about 18 months ago became too ill to live on his own and moved in with his fiancée. He hasn't rented it out, its just been empty. But would the tax office say it was no longer his main residence?

Going to throw this in the ring, it may not help though.

If you have a mortgage on a buy to let property the interest us tax deductible, you count it as a cost so pay less tax.

The mortgage on your own house you may out if taxed income.

It may be worth doing the sums on whether you would be better paying off your own mortgage and then using the rest to fund a deposit on the rental property. Of course there may be early repayment fees which could make a big difference.

In general I would invest in the property but would talk to an independent financial adviser to work out how best to do it.

Sorry for typos fat fingers and 2 big glasses of wine.

If the mortgage is taken out for the purpose of buying the rental property the interest is tax deductible, regardless of whether it is secured on a different property or not. Hmrc guidance changed a few years ago on this. You'd need to be able to document it separately to any existing mortgage though.

There's no cgt to pay on an estate on death, and you inherit the property at the probate value for your own base cost. You will be liable to cgt on selling the property though, and income tax on rental income. Which is a big disadvantage compared to topping up tax efficient savings like pension/ISA.

Ask yourself this, if you had the £120k or whatever in your bank now, would you go and buy a rental property with all of it, or would you think it more sensible to invest in a diverse portfolio? And if you would buy a rental property, would it be this one? Don't make the mistake of keeping it just because you already have it.

Ps I am an IFA! But don't take that as advice, as any proper advice needs to be based on a complete picture of where you are and where you are going.

OP, re IHT: forgive me if someone else has said this or you're already aware.
You can deduct certain expenses from the total value of the estate before calculating your IHT. They are broadly classified as funeral expenses, plus those expenses that the deceased would have had to pay, had he or she still been alive. Thus, I have set against IHT the last electricity bill, the last phone bill, outstanding service charges, ground rent, and the accountants' bill for the last tax return. You cannot, sadly, claim for an accountant to do the IHT400! Funeral expenses are totally deductible from the total estate, and given that they can run into thousands, it's definitely worth finding all the bills and so on.

This is all really helpful, thanks.

Yes. Looks like the funeral will be 4k plus so good to know we can "take it off" the estate for inheritance tax.

If I had 120k would I buy a rental property or diversify it??? I'd like to think I'd get a rental property. But because I'm lazy and it would all seem like so much hassle to find and buy a property I'd probably never get round to it! Plus I'm quite cautious so I'd be nervous about buying a house which later has problems. I know any house can develop problems but I'm more confident as I know this house well and it is in good condition.

Would I buy this one? I think so. It's a lovely house, great location. Very rentable, nice period features in the house.

Thanks for the info about off setting the tax deductable interest. Makes sense to take a bigger mortgage out on our home if we can.