|
Click the image above to download the FPM Chartered Accountants Magazine. Your Questions Answered by FPM
Question: My daughter started university in September. Should I be considering the tax benefits of purchasing a property for her while she is at university or is it be more tax efficient for me to rent a property for her?
Answer:
If you buy a property in your name and allow your daughter to live in it with her friends, any uplift in value in the property between the date of acquisition and disposal would be liable to capital gains tax at 18% or 28% when the property is sold, depending on the level of other taxable income you have in the year of the disposal. Unfortunately as the property is not classified as your main residence you would not benefit from the tax exemption given when an individual sells their principal private residence. Also, if you were to receive any rent from the property this would be taxable on you at income rates of up to 50%.
There may however be significant tax benefits in buying a property if you were willing to acquire the property in your daughter’s name. Either you could gift the property to your daughter after the purchase or you could make a loan of cash to your daughter to allow her to buy the property directly. This arrangement has several tax benefits. Your daughter would benefit from the “rent a room scheme” which enables individuals to earn tax-free rents by letting out spare rooms in their own home. Your daughter could receive rental income of up to £4,250 from any lodgers she may have in the house. This income is completely tax free regardless of what your daughter’s other income is. If your daughter has no other earnings she could also receive a further £7,475 rental income tax free as this would be covered by her annual tax free personal allowance. In practical terms therefore, your daughter could let rooms in the property to friends at a total charge of up to £225 a week (£11,700 per year) and be completely exempt from tax in respect of this income. This income would go a long way towards the mortgage repayments. Another major benefit of this arrangement is that as the property will be in your daughters name and it will be her principal private residence, it will be completely free from tax when it is sold.
If you decide to proceed with this tax planning opportunity we would advise that you obtain appropriate legal and tax advice, particularly if you are expecting a repayment of your loan. There are obvious risks with this planning as your daughter would have legal rights over the property and could dispose of the property at any time, without your prior approval, if the appropriate legal charges were not in place. Also, we would recommend that inheritance tax advice is obtained if you decide to make a gift of cash or property to the next generation. Specific advice should be sought to ensure that this tax planning opportunity suits your specific circumstances.
The advice in this column is specific to the facts surrounding the question posed. Neither MLN nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
Email: j.burns@fpmca.com
Web: www.fpmca.com Why not have a look at some past insights provided by FPM...
|
