Q. My parents stay in and pay the mortgage on my house, is this classed as rental income?
I have owned a house for 12 years which I don’t currently live in. My parents live in the house and they pay me just enough money each month to cover the mortgage payments. Should I pay tax on the money they pay to me and what agreement or documentation should I have in place?
A. HMRC would almost certainly say that the money your parents are paying you is rent for living in your house, and as such is taxable income for you. Until April 2017, this would not result in you paying any income tax on the rent if you are repaying an interest only mortgage, because your allowable expenses basically equal the taxable income. If the rental income exceeded the mortgage interest payments in the year you would have had taxable rental income. From April 2017, the rules regarding the deductibility of mortgage interest have changed, with relief being restricted to 20%.
From April 2017, if when this rent is added to your other taxable income in the tax year you do not go over the higher rate threshold (£50,000 for 2019/20), the taxable rent you receive will not result in you paying any more income tax as long as the rental income is no more than the mortgage interest payments. However, if the receipt of the rent pushes you into higher rates, there will be an actual difference in the income tax you have to pay.
Q. Gifting property to our daughter in three parts – what are the tax implications?
My husband has a buy-to-let property and we want to gift it to our daughter. It was purchased for £60,000 and is now worth £120,000, the property currently generates £6,000 per annum gross. We have been advised to put it in our joint names and that initially we give our daughter 40% (worth £48,000) with a base cost of £24,000. We will realise a gain of £12,000 each and as a result use up our CGT allowance.
We would then gift another 40% in April 2020 and the balance in April 2021. We would each report our share of the net rental income on our tax returns until the transfer is complete. We have been advised that there will be little or no Capital Gains Tax to pay and as long as we live seven years beyond April 2021 and that the gift will fall outside of our estates for inheritance tax purposes. Is this true and would it be acceptable to HMRC?
A. HMRC would officially object to what you are planning to do, but within their own guidance you can see that HMRC recognise that it is not easy to challenge the taxpayer on this. Furthermore, many people in this country already do exactly as you are planning, indeed many tax advisers would not hesitate to advise as you are planning. It is also worth pointing out that it might be worth getting an independent valuation of the property, because you might get a valuation for less than £120,000.
Q. Stamp duty land tax on property bought in my son’s name
I already own a property in Edinburgh and wondered if I could buy a second one (also in Edinburgh) for my son who is only 12 years old and thus not have to pay the Additional Dwelling Supplement (ADS) in respect of Land and Buildings Transaction Tax (LBTT)? And if so, would I be able to sell it before he is 18 if I wanted to?
A. Naturally, you want to avoid paying the extra 4% ADS on the purchase of the second property. Unfortunately, the legislation counters just such a plan and for LBTT purposes, this second property will be attributed to you as the parent.
If you did go ahead and buy the property in your son’s name, yes you could sell it before he is 18, if it was clearly to his advantage to do so, because you have a financial responsibility towards him.