Account in son's name

milleniumaire

Last year we purchased a buy-to-let flat with a 75% interest only mortgage and we are now getting a regular income from it. Currently, the income is paid into our joint Santander 123 account and the mortgage payments also come out of this account, which is essentially our "household bill paying" account.
My wife would like to open another Santander 123 account and use this purely for the flat - to ensure that the rental income doesn't get squandered away and to segregate the finances of the flat. We both work and each of us are just in the 40% tax bracket.. Being in our early 50's we get over £1000 each per year from bank and investment interest. The tax on interest changes coming in this April will therefore give us some relief on this, however, the tax on dividends changes will take more away from us. Talk about giving with one hand and taking away with the other

So, my question. What are the implications of opening a Santander 123 account in our 19 year old sons name and having the rental income paid into this? Our son is a university student and we currently support him by paying for his accommodation. A number of questions spring to mind:

1. What are the tax implications of the interest received from the account in his name?
2. Would it be unusual for the bank to receive their mortgage payments from an account in the name of a person that isn't on the mortgage deed? (I guess we could ask the bank).

Thanks in advance for any advice on the pros and cons of doing this.

Linton

If you generously give the rental income to your son, as you would be doing by putting it in an account under his name, and your son gets interest from it, then the interest is his income and is taxed accordingly. And of course he would be free to spend it as he wished.

Of course the tax on the rental income itself remains your liability.

milleniumaire

So, although we are essentially gifting the rental income to our son by placing it in his account, he would be generously paying the mortgage interest for us, however, as this is considerably less than the rental income he would still be gaining from our gift. There would also be other payments he would need to make from his account during the year, such as ground rent, service charge, insurance, maintenance etc.

colsten

As the owner of the flat, you are accountable for any profits from the flat, regardless to where you squirrel the profits.

Eco_Miser

milleniumaire wrote: »

My wife would like to open another Santander 123 account and use this purely for the flat - to ensure that the rental income doesn't get squandered away

So, my question. What are the implications of opening a Santander 123 account in our 19 year old sons name and having the rental income paid into this? Our son is a university student

I know not all university students are squanderbugs, but ...


You would be gifting him the income from the BTL, in the expectation that he pays all the expenses associated with it, then uses the excess for his accommodation? And the interest on the account, which he would presumably not need to pay tax on, would also be his to do as he likes.

bowlhead99

milleniumaire wrote: »

So, although we are essentially gifting the rental income to our son by placing it in his account,

Can you afford to gift him all the rental income, given you owe tax on the rental income at your marginal rate of 40%?

he would be generously paying the mortgage interest for us,

That is very generous of him although it would make more sense for him to gift you enough money to pay your own mortgage interest bill, given you want your property rental business to suffer interest expense as a consequence of its borrowings so that it can claim a tax deduction of 20%.

There would also be other payments he would need to make from his account during the year, such as ground rent, service charge, insurance, maintenance etc.

Why does he need to pay property maintenance costs and service charges and insurance for your property rental business when he doesn't have a property? Wouldn't you want to pay such costs yourself, assuming they are all allowable against your rental income and save you tax at 40%?


You probably need to have a proper think through of how you run your business affairs and exactly what money is whose and why. There are plenty of decent interest paying accounts around and it certainly makes sense to segregate your personal mortgage and household expenses from your property business income and expense.

Why don't you just open up high-paying accounts at another bank, keep it simple and pay your taxes. For example Lloyds is good for a joint account and two personal accounts of £5k each and 'regular saver' of £400pm each, all paying 4%. That's still 2.4% net after your 40% tax. As well as the annual free cinema tickets or magazine subscriptions or whatever.

Or, you mention the two of you are only 'just' in the 40% brackets. Why not put a bit more into your pensions and drop down to the 20% bracket? You'll be old enough to draw out a personal pension soon anyway if you actually need the money. As an aside you say you'll be paying more tax on your dividends; as a 40% taxpayer you realise you get £5k allowance each before you pay a penny right?

kidmugsy

You can gift your BTL income to whom you like, you still have to pay income tax on it.

[Deleted User]

milleniumaire wrote: »

opening a Santander 123 account in our 19 year old sons name

You couldn't - he'd have to open it himself.

But intricacies aside, the interest itself will be taxed as your son's, because it will belong to him as the account holder. Of course, if you are the landlord, the rent itself is taxed as YOUR income, no matter whose bank account it goes into.

Playing_with_Fire_2

Have you considered putting some money into a pension to reduce your income below the 40% threshold and then you wouldn't pay tax on the savings? It might not work for you but might be simpler?

milleniumaire

Sorry, for not getting back sooner, but I've now had a chance to gather my thoughts.
Paying more into a pension isn't an option; we need the money to live off and so have to accept that we will pay 40% tax on some of it.
Clearly, the main reason for wanting to use an account in my son's name is to use his interest tax allowance (from April).
So, if after paying the mortgage, the remaining rental income is transferred into his account, this would become his money. I understand that, however, he may be 19 and at university, but we still have full control over his finances and he requires financial support from us, so he's not about to run off with a "small" amount of savings.
We would transfer funds from his account to ours to cover the cost of maintenance etc. when required.
What I'm not sure about is how HMRC would see this arrangement? While we are keen to avoid paying more tax, I don't want to do anything that would be classified as tax evasion.
Essentially, money would be transferred from us to him, then some of it back to us (now and then).

colsten

milleniumaire wrote: »

What I'm not sure about is how HMRC would see this arrangement? While we are keen to avoid paying more tax, I don't want to do anything that would be classified as tax evasion.

Profit from your rental property is your taxable income that you need to declare. What you do with the proceeds after you have taxed them is nobody else's business. You can give your money away without consequences unless you die within 7 years of giving them away, or if you become in need of state care.