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.

lisyloo

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.

Yes they will have to pay tax.
Income tax relates to profit from the rent (non-existent in this case), whereas CGT relates to capital gains on a house they are NOT living in.

If so, is there any way around this?

Don't know your circs but if you get the mortgage it will be your PPR and therfore will be tax free.
I presume there is some reason this is not possible or desireable but can't comment further as we don't know the full situation.

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

Well firsly they'd only have a huge tax bill if they had a huge profit and secondly CGT is only a proportion, but yes they do need to factor it into their sums.

Another way round it might be for them to live in it for a while for it to become their PPR.
I am not sure what constitutes living in it, so you'd have to look into it, but it's an avenue to research.

Ameliajane2011

Hi Lissyloo,

Thanks for your reply.

Our property hasn't sold and it's not currently possible to buy another whilst we still have this mortgage but need to move for work now which is why my parents made the offer they have.

I was also going to ask that if we covered the increased payment part of their mortgage if they would have to pay tax on this - from your reply am I right in thinking that they would have to pay income tax if we did this or could we just say we were giving the money to them?

Thanks for your suggestion of researching what counts as living in a property - will look into this.

Thanks again

Ameliajane2011

Does anybody know if my parents were to put the new property in their names and my name if this would prevent them needing to pay capital gains tax as I would have been living in the property? Sorry if this sounds like a silly question - am not really sure where else I can go to get information on this subject.

Thanks

atush

If it was in all three names, they would only be in line to pay CGT on 2/3 of any gain. Unless, you made the ownership 50% to you, in which case they would have to pay tax on 50% of any gain. But they do each have a CGT allowance, so would the house be likely to go up 4x a single CGT exemption?

Ameliajane2011

Hi Atush,

Sorry if this sounds really dumb but what do you mean by likely to go up 4x a single CGT exemption?

lisyloo

I right in thinking that they would have to pay income tax if we did this

They have to pay income tax on any "profit" they make.
So at a high level that's rent minus expenses.
Interest can be an expense (but not capital payments), repairs, decorating etc. are also expenses.

or could we just say we were giving the money to them?

I am pretty sure it would not constitute an unconditional gift if it was in return for living in a house.
So no, I don't think it's that's easy to get round legally I'm afraid.

Does anybody know if my parents were to put the new property in their names and my name

You may well find the lender has an issue with you being an owner but not liable on the mortgage.
For example the mortgage company cannot repossess if you own 1/3rd and therefore you might find them unwilling to enter into such an arrangement.

Sorry if this sounds really dumb but what do you mean by likely to go up 4x a single CGT exemption?

Every adult gets a CGT allowance of £10,600 per year.
So if your parents jointly owned the property and sold it for a £21,200 profit then they would not pay any CGT on this (assuming they have no other gains in the same tax year).

Why don't you just rent somewhere temporarily?
The outlook for housing is uncertain with big public sector job cuts looming are you potentially dragging your parents down because they are trying to help you.
Sorry if that sounds horrible, I'm really not meaning to be but has this all been thought through?
Do they really want to get into property investment or are they just doing this to help you out?

Could it all go horribly wrong?
For example you own 1/3rd. You die and your 1/3rd goes to your husband and your parents cannot buy him out because property prices have fallen?
I'm not being judgemental, but have all the scenarios around death, sickness, redundancy and divorce been thoguht through.
Do you have any siblings? If so will they want your parents money (their inheritance) tied up in a cheap rent scheme for you?

Presumably for your house you've had feedback from the estate agents from viewings?
Have you asked your estate agent what you need to do to acheive a quickish sale (usually drop the price)?

Please don't get the hump, I'm just trying to help by raising these issues :-)

atush

Yes, I meant would the house be likely to increase in value by more than 42,400 which is the current CGT exemption times 4. your 'half' wouldn't attract CGT if you were living there.

lisyloo

your 'half' wouldn't attract CGT if you were living there.

But.............I'm pretty sure she would have to be on the mortgage.
The lender will not allow a mortgage for the parents on half a house because they can't (easily) repossess half a house and Ameliajane cannot take on another mortgage at present.

Whether they would allow her on the mortgatge with parents as guarantor is a question for a mortgage broker, but my guess is that if it is available then it will be at a premium, so you then have to compare the costs with the CGT, which is difficult as we don't know the gain.
You have to make some assumptions, do some scenarios and take a view if it's offered at higher cost.
It's possible it won't be offered at all.

Ameliajane2011

There wouldn't be a mortgage on the new property - my parents would be increasing their own mortgage on their current property which currently has a large amount of equaity with a very small mortgage. I have spoken with a mortgage advisor who advised that as the new property is in affect being bought with cash it would be up to my parents who they wanted to put down as the owners - hopefully this is right! Thanks for all your replies. It's given us something to think about and discuss with my parents.

Ameliajane2011

Please excuse the spelling in that last post - it's been a busy day