Lending money to son and Capital Gains Tax

londonsarah

Hi all, can anyone advise on capital gains tax? Myself and husband are lending my son and his girlfriend some money to buy there first property, £80k, the property is in need of a complete update and is in an area where hopefully in a couple of years it will be worth more (currently the average price in the area is £120k for this type of property). The agreement is that we will borrow them the money from savings and they will re mortgage next year when my son finishes university, at that point they will repay the money to us. We are planning for him to buy it in his name an us lend him the money, but have seen about capital gains tax? We are going in to speak to the bank but can anyone offer advice before this, will it be payable? If so is there a way around it, i.e. we buy it in our names etc? Thanks in advance Sarah

creditboy

What would you do if your son couldnt get a mortage after he left university?

Pee

If you lend £80,000 and this is repaid, there is no CGT. Make sure you get proper legal agreements, and make sure that you have a plan B if it cannot be repaid by remortgaging or if they split up.

Any interest will be subject to income tax.

londonsarah

we have agreed that if he has no job within 4 months of finishing uni that we will sell the property. he has been saving his student loans and has enough money for one years worth of the mortgage payments and legal fees etc, we are simply enabling them to get the money together now until they can re mortgage and transfer the debt. As i said the property is 80k but the similar ones in the area are 120k, but i am aware that the property prices may go down further and there is an element of risk, it was just the tax i was unsure about.

Rockporkchop

I think CGT is the least of your worries. Is allowing 4 months to find a job after finishing university realistic in the current climate? There are hundreds of people applying for every job. It's a lot of pressure for your DS to have to find a job that covers the mortgage within 4 months or his house will be sold from under him.

And what happens if you put the property on the market after the 4 months but it doesn't sell for a year? Who would pay for the mortgage?

sooz

londonsarah wrote: »

£80k, the property is in need of a complete update and is in an area where hopefully in a couple of years it will be worth more (currently the average price in the area is £120k for this type of property).

How does he plan to pay for the 'complete update' needed?

Fire_Fox

Is it wise for your son to live in a house that needs completely updating whilst he is in his final year? Who is going to project manage the building works? Do you even know the place will sell again in a year's time? The market is very slow now. Who is going to pay the costs of selling (solicitors and estate agency fees) if that is required?

00ec25

londonsarah wrote: »

The agreement is that we will borrow them the money from savings and they will re mortgage next year when my son finishes university, at that point they will repay the money to us. We are planning for him to buy it in his name an us lend him the money,

the 2 key points are:

- The property will be in his name
- you are lending him the money to purchase it

what is unclear is:
what do you mean by borrowing from savings?
- If you mean you are taking a loan out from the bank in your names and passing the money on to your son then I assume your son will simply be paying back to you as a lump sum the total amount you have to pay the bank.
- If however you are simply taking the 80k from your own savings and are not borrowing it yourselves then are you charging him interest or does he simply repay you exactly 80k?

CGT
· You have no CGT liability at all on the property as you do not own it, he does.

· He will live in it as his main residence and therefore will get Principal Private Residence Relief when he sells it, ie he will not pay any CGT

• Do not buy in your names, you will then own 2 properties simultaneously and will absolutely have to pay CGT when you sell it

Inheritance Tax
the fact you are lending him money means that, for as long as the loan remains outstanding, the balance of that loan forms part of your and/or your husband’s estate (depending on whether you took the loan in single or joint names). Therefore, in the slight chance that either of you dies before 7 years have elapsed after the loan is fully repaid, your estate may have to pay Inheritance Tax - if you are above the IHT threshold

Income tax
If you have borrowed the money ytourselves from the bank then the fact youyr son pays you an amount equal to what you owe the bank does not necessarily mean that the "income" from your son can be offset against your debt. You may have to pay income tax on the income you get from your son

if you have lent your son money withdrawn from your own savings then as long as you do not charge him interest there is no income tax due, if he does pay you interest obviously you will have to pay income tax on that interest

londonsarah

hi thanks for the concern, my son is actually in his final year before qualifying as an architect so the plans side he has sorted, the build side is going to be shared between him (when he can) and his dad, and also his girlfriends dad, who has a construction company. The property is a repo and is in a much sought after area where there is nothing at this price even with the slowdown, as I said before the lowest priced place is on at £120k which I know is not a guarantee but gives a rough idea of what it may be worth. With regards to the payments, his girlfriend actually owns her own business and could take over the mortgage next year if necessary, but cant at the moment due to a loan which finished in 6 months time. It was just the tax which I was unsure about, i.e. giving them the money to receive it back?

Icey77

The lending of the £80K is a PET - Potentially Exempt Transfer, should the money not be paid back and you die within 7 years then the money becomes subject to inheritance tax.

If the money is paid back = no problem
If you die after more than 7 years = no problem

This is a very simplistic look at things, I would suggest you talk to a professional financial advisor or tax specialist with a view to planning for your estate.

This is never a particularly pleasant subject to discuss, but planning now what would happen to your assets and belongings should something happen will make things a lot easier for everyone else if it does. Particularly with a large amount of money like £80,000! This should be documented properly and you should ensure that your son properly understands what he would be liable for should the unthinkable happen.

I hope it all works out and the money is paid back as planned but just in case it's a good idea to have a plan if something untoward happens :beer: