Do you have to pay tax on second home that family are living in?

Ameliajane2011

Hi,

My parents are thinking of realising equity in their property to buy a second house for me to live - am moving to the area and my house hasn't sold so will be renting it out. I will need to live in this house for 5 - 10 years. After this time my parents will either rent it out or sell it.

Their current property will have an increased mortgage but the second property they buy will be bought outright with the money raised against the first.

If they choose to sell it will they have to pay capital gains tax on any profit they made if I haven't paid them rent so they would not have benefitted financially from owning the house just possibly when selling it.

If so, is there any way around this? It may not be an option if they are going to have a huge tax bill at the end of it.

I hope this all makes sense! If anyone has any experience of this or could point me in the right direction as in who to ask I'd be really grateful Amelia.

sonastin

I think that they do have to pay CGT but it will only be on any increase in value less their personal allowances for CGT over the time it has been owned. Not necessarily going to lead to a huge tax bill, especially if the housing market remains flat over the 5 years or so that you plan to be there.

Ameliajane2011

Thanks for your reply.

We're currently looking at different ways we can move and my parents have offered to help. I was also wondering if I paid a monthly payment to cover the rise in their mortgage if they would have to pay tax on this? I don't want them to be out of pocket but I also don't want them to have lots of tax to sort out as they are already self employed so have enough of this sort of thing to deal with already. They wouldn't be making a profit as I would just be paying increased part of thier mortgage payment.

Thank you!

CLAPTON

if they buy a property for you to live in then they will be liable for cgt when they sell
of course the cgt will only be huge if the gain in huge: would they prefer a smaller tax bill and a smaller gain?

they could of course give you the property and then there would be no cgt if you eventually sold it.

if you pay them money for living there then that would be taxable as income for them

Ameliajane2011

Thanks for your reply.

As this house would in affect be a cash purchase with no mortgage would my parents be able to buy it in their name and my name - with me living in would this take away the need to pay capital gains tax or not - sorry if this sounds like a silly question - am not quite sure who to best people to ring and get info from would be.

Thanks again

CLAPTON

Ameliajane2011 wrote: »

Thanks for your reply.

As this house would in affect be a cash purchase with no mortgage would my parents be able to buy it in their name and my name - with me living in would this take away the need to pay capital gains tax or not - sorry if this sounds like a silly question - am not quite sure who to best people to ring and get info from would be.

Thanks again

if the property were jointly owned say 50-50 then half the gain would be free of cgt and the other half would be liable for cgt.

what sort of gain are you expecting to make in 4-5 years ?

Ameliajane2011

My plans are still a little up in the air - it could be 5 years - 10 years or a little longer. I know that house prices are unlikely to soar in this time - I just want to make sure that my parents won't be left with large tax bills for helping us - from what's being said though they should be ok. Thanks for your help

theartfullodger

You are asking what the CGT regulations will be when the place is sold some years ahead.

Nobody here knows.

(Until) the government changes the rules the government doesn't know either.

Anyway, ain't paying your fair share of dues & taxes our patriotic duty?

Cheers!!

holly_hobby

Ok lets clear things up on this firstly and generally speaking ....

Property related CGT - is liabile upon the sale or disposal of an property that is not your declared main residence.

CGT is due on any gain realised over the period the property has not been the holders main residence - net of cgt allowances as discussed below.

Private Residence Relief on those periods it has been held as main residence


CGT Allowances

(Remaining) Personal annual CGT relief

PLUS

If the property has been the holders nominated main res at some point pre sale -the last 36 months of ownership, whether the property was the holders main residence or not during that time, is excluded from any CGT calculation (i.e treated as the holders main res regardless

PLUS

If the property is let out during the period of ownership, and the propety has at some time previous been their main residence - the holders will also qualilfy for lettings relief. Which is (currently) 40k, subject to conditions .


In this particular case. your parents intend to pch the property in their own names, and to never use or nominate it as their main residence, but for a 2nd abode for you to reside in.

In this case they are exposed to:-

CGT on the full gain realised on sale/disposal LESS their annual (remaining) CGT allowance (which is for 2011/12 is £10,600 individual allowance)

If the proprty is registered as joint owners with yourself each having an equal share of the property the following applies on sale.

• You - no cgt as the propety is your sole/main residence
• Mum & Dad - CGT due on their proportionate share of the gain realised upon sale, with allowance deductions as discussed above.
• On Mum & Dads passing the property, as a joint owned, will wholly pass to you, the surviving owner
• So would suggest this is discussed with other siblings.
• Or write the property as Tenants in Common - whereby the % holding of each individual can be set at different proportions, and form part of their estate. However by doing this each individual is permitted to inc their % holding in their will i.e Mum & Dad can then leave their % to whomever they wish - again suggestions on how this will be realised to the beneficiaries (i.e property sold, you buy their share, etc).

Mum & Dad, may nominate either property as their main residence and must do so within 2 yrs of ownership, there nomination may be subsequently changed - but can not be backdated more than 2 yrs. And this is a way to maximise CGT allowances.

If Mum & Dad nominated prop no 2 as their main residence & live in it for a period (think min is 3-6 mths), then its sold within 3 yrs of their nominating another main res (i.e back to their current home), then they will open up the max amount of cgt relief to themselves, in that the last 3 yrs of ownership will also be discounted from any CGT calculation.

I don't think (if it is purchased in their sole names, nominated as their main res for a period & subsequently "let" to you for a rental income), that they will qualify for additional lettings relief, as it is a connected family member - possibly if a 3rd party also rented i.e you got a house mate - they may qualify for this additional relief - HMRC would be able to give you correct direction for that.

Finally, in respect of all parties, but esp Mum & Dad, the writing of a will is recommended to ensure wishes are adhered to, and to speed up probate.

Hope this helps clear things and give an overview of possible routes to take ...

Holly

antrobus

Ameliajane2011 wrote: »

... It may not be an option if they are going to have a huge tax bill at the end of it.. .

OK, I'll state the obvious. (It sometime needs to be done.) They're only going to have a "huge tax bill at the end of it" if they make a 'huge profit' on the property when its sold. I'm not so sure why that should be a dealstopper.

TrickyDicky101

I would suggest the optimum solution would likely be for Mum & Dad to loan you the money for you to purchase this new house outright. Then there will not be any CGT payable when you come to sell the property (Primary Residence Relief). This would mean that you take on significant debt though and the parents won't have the security of owning a real asset (ie the house), although they could place a charge on the property to secure their interests.