Buying an investment property for children

RonnyRaygun

Hi, first post on this forum and looking for some advice on the above.

When our first son was born in 2010 we happily accepted the government's donation of £250 and set up a trust fund for him. Our second son was born eighteen months ago and while the cut meant he got nothing from the government, he also got a savings account from us.

However, it has occurred to me that with interest rates at around 1% and inflation at around 3%, the money is actually losing value every day it is in the bank.

So I'm thinking of buying a property to rent out, as a way of saving money for the kids.

And with that in mind I've been thinking of the best way of maximising the return my investment. I've looked into areas and found an area I know that appears to give a good rental yield. So that's sorted.
I then started looking at buy to let mortgages. Obviously fees and interest rates are higher on a buy to let mortgage than on a standard mortgage, which is where I had a thought.

Can I take out additional monies against the value of our home (lower fees and interest rates), and use it to buy a property for my children to rent out?
I don't see a problem with this in itself, but obviously this leads to the issue that effectively owning the rental property outright means tax gets paid on the full value of the rental income, not just the profit after the interest is paid.
Then I thought "but if the property is in my children's names, they won't have to pay tax". So putting the property in their name seems like a good idea.
But one final problem. We would still require the rental income to pay the additional mortgage back. So would there be a way of effectively lending the kids the money to buy the property, and then being paid back by the value of the rental income each month? What would be the tax implications of this?
If this works the kids get a property which grows in value over the next twenty years or so, and the rental income effectively pays the mortgage with a bit more to spare, and we get to borrow the money at a lower rate than traditional buy to let mortgages, and potentially tax free.

Someone come along and point out the hole in my plan please!

cte1111

Property can't be in the name of people under 18, so that would be an immediate problem.

RonnyRaygun

Didn't realise that.

OK, so it looks like it has to be normal buy to let in my name then...

Well, it's not the end of the world, just mean there will be higher fees and more tax paid, which is a shame.

RonnyRaygun

Although I have just found this, which implies that tax would have to be paid on "profits", but CGT would not apply.

A minor under the age of 18 cannot own land or property in the UK, so it would have to be owned in trust by trustees, e.g. parents, for the beneficial ownership of the 13-year-old.
Any asset owned by a child under 18 and unmarried, derived from the property of the parents that produces income of more than £100 per year, is taxed on the parents as the parents income.
However this doesn't apply for CGT purposes.
One possible solution is to create a ‘bare’ trust. A ‘Bare’ trust can be created where that the child is the beneficial owner, and the parents are the legal owners who hold the property effectively as nominees. When the property is sold it will be taxed only on the child (who will have their own CGT annual exemption, and perhaps lower tax bands - if they don't have much other income) and not on the parents.
But it must be remembered that the child cannot be prevented from having the property put into his own legal ownership at age 18.

cte1111

The income would have been seen to be yours anyhow. This is because children's income over £100, which derives from their parents, is taxed as if it is their parent's. Otherwise people would just put their savings into their children's names to avoid paying tax.

You could possibly look at a bare trust, with the children as the beneficiaries. This would avoid CGT when the property is sold, but you would still have the same issue with the income in the meantime.

Thrugelmir

Repayment of the borrowed money is made out of after tax profit. So you'll need to crunch the numbers to see if it works. So much depends on the rental yield on the property.

The boom years of BTL were based on capital gain not rental profit.

G_M

RonnyRaygun wrote: »

Can I take out additional monies against the value of our home (lower fees and interest rates), and use it to buy a property for my children to rent out?

Provided your income is sufficient to satisfy your currenet lender, and there is sufficient equity in your home, you could increase your current mortgage and use the cash to buy the new property:

* The issue around ownership is separate. See posts above re kids under 18 owning property, trusts etc
* if the property was in your name, you could still claim tax relief on the interest repayments on the additional loan you took out (not the whole mortgage). You'd need to be able to demonstrate to HMRC that the extra loan was used to fund the let property and could therefore be used to offset tax on the rent.

CGT is an issue, though a Trust might get round this. But then I suspect you could not offset the loan on your home against the trust's tax liability!

You might need some specialist tax advice here.....

RonnyRaygun

Thrugelmir wrote: »

Repayment of the borrowed money is made out of after tax profit. So you'll need to crunch the numbers to see if it works. So much depends on the rental yield on the property.

The boom years of BTL were based on capital gain not rental profit.

Yeah, I understand that, but my thinking is that as long as the rental income covers the repayment mortgage and any essential maintenance, then the property is effectively bought for you, meaning that all you've spent on the property is the deposit required to get the mortgage. Capital Gain is an added bonus.
Certainly from the perspective of the alternative being leaving the money in the bank to gain what, a couple of hundred quid interest a year.

It does look like there is no way of avoiding the income tax though. Not sure what the capital gains allowance would be on a trust, so not sure whether it's worth putting the property in the names of the kids.

19lottie82

There are a lot safer investments than property. Property is a very risky investment. If I were you I'd be putting your child's money in the highest interest account that you can find and letting him decide what he wants to do with it, when he comes of age.

RonnyRaygun

19lottie82 wrote: »

There are a lot safer investments than property. Property is a very risky investment. If I were you I'd be putting your child's money in the highest interest account that you can find and letting him decide what he wants to do with it, when he comes of age.

There is *some* risk in property. You might not be able to rent it out for periods of time, the tenant might wreck the place, the value of the property might go down. But it will most likely bring a much better return on investment long term, even if the value of the property remains the same.

If I've got, say, £25000 to invest, I can stick it in the bank and let it accrue interest. After 18 years at 4% interest that would be worth £50000. I can turn £25000 into 100000 if I invest in property (assuming a 25% deposit on a £100000 property, plus any profit on income (if any), plus any capital gain (if any).

There is more risk, but the return is potentially much greater too.
I've been renting out property - one three bed house and one small flat (not at the same time) - since 2006 and while there have been a couple of problems, it's generally been very easy going.

19lottie82

What happens if when your sons are older one wants to sell to get his £££ but the other doesn't?