A Family Matter – Helping a disabled son

Our son is disabled, and we would like to buy a property for him and his partner. My husband and I are in our 60’s. We have paid off our own mortgage and have built up savings over the years and are both on good pensions, so we would be able to purchase a small house outright. We want to put this house in our own names and then charge our son a small rent – what do you think of this plan?

I think you may need to rethink your strategy, as it has a number of tax pitfalls. Firstly any rent you receive from your son will be taxable onto you and your husband, as buy-to-let income. Secondly if the house is in your and your husband’s name it will be classified as an investment property. What this means is that if the house is sold it will be liable to Capital Gains Tax (CGT) on any increase in its value. Finally the value of the house will remain in your own names and therefore be subject to Inheritance Tax (IHT), which may mean a 40% tax charge upon your deaths.

There are probably a number of better options for achieving your aims. The first may be an outright cash gift to your son to allow him to purchase the house in his own name. This, as long as the gift is documented properly and is ‘without strings’, and assuming that your son continues to live in the house as his main residence should solve the CGT and IHT issues. The main downside to this plan is that an absolute gift of the money to allow the purchase of a house, may affect your son’s state disability benefits.

Another option would be to set up a trust for your son, controlled by trustees, who could be yourself and your husband plus others. As long as this is done correctly, it could give your son the right to live in the house during his lifetime. The ultimate beneficiaries of the trust could be his partner and/or children, or indeed other family members, but for the gift to be effective for IHT purposes this must not include you or your husband. Pri nciple Pr ivate Residence relief from CGT would apply upon the sale of the house, as long as it had remained the main residence of one of the beneficiaries of the trust (your son). This type of planning would certainly involve more detailed advice and, to be effective, professional assistance.