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Where Taxpayers and Advisers Meet

Buying second home for children

YTSS
Posts:6
Joined:Sat Apr 08, 2017 9:15 pm
Buying second home for children

Postby YTSS » Sat Apr 08, 2017 9:30 pm

Hi

I am hoping to buy a second property for my children who are both over 18. Our house is currently mortgage free and I hope to remortgage on this house releasing the money to buy the second home in my children's names. The house would initially be let out until they wished to live in it themselves. The income from the house could be paid to us to pay the mortgage in which case ? it would be subject to income tax or we could pay the mortgage and the income paid to them. In the second case would the income then not be taxable as it would be within their personal allowances. The above sceniro would avoid paying the extra stamp duty now payable on second properties, and would avoid CGT as it would be their main residence. Can I also assume that the cash gift would also be a PET, and tax only be payable if one of us die within 7 years. Is there anything else I should consider, be thinking about. Is there any formal way in which this should be documented legally.
Thanks for any advice

mkmum
Posts:5
Joined:Tue Feb 12, 2013 1:44 am

Re: Buying second home for children

Postby mkmum » Sat Apr 08, 2017 10:41 pm

Are you sure it would be exempt from the extra stamp duty if its going to be let?

YTSS
Posts:6
Joined:Sat Apr 08, 2017 9:15 pm

Re: Buying second home for children

Postby YTSS » Sat Apr 08, 2017 11:01 pm

I have just checked, as long as the house is purchased in the child's name it is exempt - they have to be 18 or over to purchase a house. Many parents are buying for younger children, in which case they would not be exempt.

bd6759
Posts:4262
Joined:Sat Feb 01, 2014 3:26 pm

Re: Buying second home for children

Postby bd6759 » Sun Apr 09, 2017 12:19 pm

If it is their house, the income would be taxable on the children. They would not be able to claim any relief for mortgage interest because they are not liable for the interest.

maths
Posts:8507
Joined:Wed Aug 06, 2008 3:25 pm

Re: Buying second home for children

Postby maths » Sun Apr 09, 2017 2:13 pm

The purchase should avoid the 3% SDLT charge as the children are 18 or over. A child under age 18 can be the 100% beneficial owner of property; however, such a child cannot own the legal title.

As it is intended that the children will own 100% of the beneficial interest in the property they will be entitled to the rental income and exposed to income tax thereon subject to any available personal allowance. If as parents you are to receive any rental income by way of entitlement then the children as legal owners would need to re-transfer back to you a beneficial interest in the property.

YTSS
Posts:6
Joined:Sat Apr 08, 2017 9:15 pm

Re: Buying second home for children

Postby YTSS » Sun Apr 09, 2017 4:17 pm

Hi

Thanks for the replies. In terms of the reply by maths, would you be able to explain your second point if we were to receive any rental income from the property/beneficial interest transfer. I am not very clear on that point.

The other thing I may have stumbled across, maybe somebody could answer. We would be gifting the money to purchase the property and thus i thought initially, it would be a PET and subject to IHT only if we die within 7 years. But it appears as long as we have an interest in the property it would not be classed as a PET. In our case, I assume if we continue to pay the mortgage until they move in and take out their own mortgage, we have an interest in it and could not treat it as an PET. Is there any potential way around this. THE reason I ask is, my wife was diagnosed with breast cancer a number of years ago and the future is uncertain. If she were to die what would be the result. Do you pay IHT only if both parents die, or would they be subject to it if my wife died. Hope that is reasonably clear.

maths
Posts:8507
Joined:Wed Aug 06, 2008 3:25 pm

Re: Buying second home for children

Postby maths » Sun Apr 09, 2017 5:00 pm

You say you are buying a property for your children and as a consequence you intend to remortgage the property you/wife currently live in.

On this basis you would gift the cash released to the children who would then purchase the new property mortgage free in their own names. The gift of cash is a PET.

You would not have an interest in their property. The mortgage is not the childrens' liability and hence you are not discharging any liability on their behalf.

You say that they will take out their own mortgage and imply that on doing so they will transfer the mortgage proceeds to you to enable you to discharge your own mortgage. This then suggests you are not buying the children a property, as such, but providing them with finance by way of a repayable loan which would not then be a PET as it would not be a gift.

You need to be clear what the arrangements are to be?

YTSS
Posts:6
Joined:Sat Apr 08, 2017 9:15 pm

Re: Buying second home for children

Postby YTSS » Sun Apr 09, 2017 6:54 pm

We are trying to get them on the property ladder. Just finding the best way to do it, potentially before prices rise even further. Neither of the children are currently working, but hopefully will be in a few years time. We do not have the finance to give them a cash gift of e.g 250k, so thought if we initially took out a mortgage against our currently mortgage free property, when they are settled in jobs and earning in some way the mortgage we would have could be repaid. Not sure if they could 'inherit' the mortgage we had or if they would have to take out a separate mortgage against the property to release the funds to 'payoff' our mortgage. Not sure which option is feasible or gest to do.
What are the implications if this was, as you said, not to classed as a PET for IHT purposes. Does the 'loan' remain as oars of your estate in anyway or does it never form part of it. Would this process , if possible, have to be legally documented.

maths
Posts:8507
Joined:Wed Aug 06, 2008 3:25 pm

Re: Buying second home for children

Postby maths » Sun Apr 09, 2017 8:01 pm

Unlikely children could "take-over' your mortgage and thus would need to obtain their own.

It thus seems that you are not buying a property for them as a gift but helping them to get on the property ladder by providing finance by way of loan.

Presumably either the children will have money for a deposit or you will provide that; this would be a PET if you gift such monies or a simple loan.

You would in addition remortgage your property. The proceeds you would then lend to the children. In due course they would obtain their own mortgage and repay the aggregate loans. No IHT consequences, as the loan to children would be a debt due to your estate should you die (ie it remains in your estate).

Any loans to children should be documented but this could be a simple letter setting out the terms if everything in the family is friendly.


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