The Parent Trap
My child is off to University – is there anything I can do to help?
Q: My son is going to university, and I am considering purchasing a house for him to live in, large enough to allow him to share with a couple of his student friends. I have recently inherited some money, so will not need to raise a mortgage. What is the best way to do this from a tax perspective? Am I best to buy the property in my name or in my son’s? I am a higher rate taxpayer.
A: There are several things you need to consider. Firstly, let’s consider the position if you buy the house in your own name. This will make your son and his friends your tenants, assuming you will want to charge rent to his friends. You will pay tax at higher rate on rents received less any expenses, and as there will be no mortgage interest then there will certainly be taxable profits. I imagine you will not want to charge rent to your son, so his share of the expenses should not be claimed.
When you sell the house, if it has risen in value, you will pay Capital Gains Tax at the higher 28% rate on any gain, after your annual exemption. In terms of Inheritance Tax, the house will stay in your own estate and potentially be subject to IHT at 40%.
The tax position if your son buys the house is a lot more benign. Your son will receive rents from his student friends who will become lodgers. If he has no other income, then he can receive rental profits of up to his personal allowance of £12,570 per annum before any tax is due. If he is already using his personal allowance (because he has a part time job for example) then he may also qualify for the ‘rent a room’ relief provisions which allow for £7,500 of income to be earned tax free. Please note however that if more than two lodgers are taken the house may become a HMO (House in Multiple Occupancy) which I would recommend that you avoid.
If the house is sold by your son, then (assuming the agreements with the student lodgers are structured correctly) relief from Capital Gains Tax should be available on the grounds that the house has been your son’s main residence. The funds which you effectively gifted to your son to purchase the property will (subject to you surviving seven years from the date of the gift) leave your estate for Inheritance Tax purposes.
The real downside of your son purchasing the house is that you will lose access to the rental income it generates (as it would belong to your son), and its value will be potentially exposed to any debt or divorce difficulties which your son may have in the future. These latter risks could be reduced by the existence of a documented loan from you to your son of the funds needed to purchase the house, from which he could be released, in due course, when his future was more secure, but this does mean that the value of the loan stays in your estate for IHT purposes.
As always good professional advice will be required to ensure that you reach the best outcome for your particular circumstances.