costs (taxes) involved in gifting a mortgaged property to my Son

bk3nny

Hi,
I currently have a mortgaged flat that i have rented out. The plan was always to leave/gift/give it to my Son, but as the mortgage interest is no longer fully tax deductible and he's a student not using his tax free allowance it seems this might be a good time to gift it to him.
There is 160k outstanding on the mortgage and its worth about 230k, (initially purchased 2 years ago for 205k). Can anyone advise what is the best ( most tax efficent) way of doing this?
What would be the implications on stamp duty and CGT of gifting half of it to him now and remortgaging it as a joint buy to let? He's young, not yet in a stable relationship and doesnt own or have an interest in any other property. I'm 49, so not too worried about the 7 year IHT rule, and live in our main house together with my Son.

thanks in advance

anselld

CGT will be due on the 50% disposal at market rate.
SDLT potentially due on consideration (50% of outstanding mortgage) but will probably be under the threshold.
How will he qualify for joint BTL mortgage with no income?
Does he really want the responsibility to be a Landlord?
He will become liable for SDLT surcharge if he ever wants to buy his own property.

Sounds like a dodgy tax avoidance plan overall.

Cakeguts

Don't it isn't fair on your son in any way. He won't get a mortgage if he doesn't have an income. It seems like a nice idea to give him a flat but it isn't really nice for him. You see you take away all of his self esteem of being able to say that he worked for his flat. It is also possible that it is in a place where he doesn't want to live then what happens. He won't be able to afford a buy to let mortgage and rent or a mortgage on somewhere to live in his first job.

As he is still a student you have no idea what his views are likely to be on owning property. There is a percentage of young people today who don't want to buy property they like the convenience of renting.

He may not want to be a landlord. That is your choice. If you don't want to keep it you could always sell it?

booksurr

bk3nny wrote: »

Hi,
I currently have a mortgaged flat that i have rented out. The plan was always to leave/gift/give it to my Son, but as the mortgage interest is no longer fully tax deductible and he's a student not using his tax free allowance it seems this might be a good time to gift it to him.

so you are a higher rate taxpayer then?
interest remains deductible in full for basic rate taxpayers
and a higher rate taxpayer will still get tax relief at 20% anyway, so it is only the excess over 20% which you are trying to avoid

bk3nny wrote: »

There is 160k outstanding on the mortgage and its worth about 230k, (initially purchased 2 years ago for 205k).

so you have a gross gain of 25k because it is a "connected persons"£ transaction so must be at market value

i assume you have never lived in it yourself so the only relief you will get from CGT is your CGT allowance of 11,100 leaving you with a taxable gain of 13,900 if you transfer 100% to his name. If you transfer a lesser % then obviously the gain is on that % and your allowance is still 11,100. eg: give him 50% share and your CGT liability would be 25,000 x 50% -11,100 = 1,400. The max CGT rate is 28% so you would pay £392 in tax. Bear that in mind when exploring other options as it may be cheaper and simpler just to pay the tax to start with

bk3nny wrote: »

Can anyone advise what is the best ( most tax efficent) way of doing this?
What would be the implications on stamp duty and CGT of gifting half of it to him now and re-mortgaging it as a joint buy to let? He's young, not yet in a stable relationship and doesnt own or have an interest in any other property. I'm 49, so not too worried about the 7 year IHT rule, and live in our main house together with my Son.

it would mean he would face the higher rate SDLT when he buys his own home in the future.

likely that to be included on a BTL re-mortgage with you would mean you have limited choice of very few lenders, as most BTL lenders criteria includes the fact the borrower already owns a residential property of their own (eliminates the risk of the borrower living in the property rather than letting it and thus evading the income multiple based affordability test for loan size)

Although not based on income multiples when setting the BTL loan size, most BTL mortgages also require a minimum income nonetheless of 25k - your son has zero income !

it appears that your idea is primarily done to avoid your own tax and in so doing will transfer the liability to your son, even if he is a non taxpayer at the moment, he won't be in a few years time though

xylophone

Sell it and finance a HTB ISA /Lifetime ISA for your son?

AdrianC

If you gift him the equity in the flat, can he obtain a mortgage in his own name to cover the rest?

Or will you be paying the mortgage off fully, then gifting him the entire property?

Will he be living in this flat, or will he be letting it?
Does he WANT to take on all the legal implications of being a landlord?

Kynthia

Due to the new second home stamp duty there are loads of younger people who own a share of a property and are regretting it. This can be due to family gifts, inheritance or parents miguidingly trying to avoid their home being sold to pay for care and putting it in their children's names. They are being burdened with future CGT and possibly income tax, but mostly they find it difficult to get a mortgage for their own home and have to fork out extra thousands for the higher stamp duty when it's already taken them years yo save for a deposit and buying costs. They often don't even have the choice of selling due to only being a part owner or it being their parents' home.

Gift your children money rather than commitments, restrictions and responsibilities. Sorry to sound negative but until they are on the property market themselves or look like they never will be then there just seems to be so many downsides.

bk3nny

Thanks everyone for your time and input.
I dont think this is a dodgy tax avoidance scheme at all, rather a reclassification of income. If i'm being taxed on the rental income at 40% and also paying his living expenses for Uni, then why not transfer the equity early, give him an income stream and allow him to fund his own way through Uni? ( Although in reality this would also need to be supplemented). The flat will be his one day anyway...
I had figured the increased SDLT when he came to buy his own property wouldnt be an issue in this case because once he was finished Uni and working i would transfer the remaining 50% to him, so he wouldnt need to buy a second property. Once he moved in and lived there for a while he could sell it as his main home and buy something else if he wanted without any CGT liability. It was a way of allowing him to step onto the property ladder early. He likes the flat, its location and employment opportunities in the immediate area and its connections to London.
the other concerns about whether he wants the responsibility etc, were something that i would obviously talk to him about prior to doing anything anyway. I would continue to handle the day to day hassles until he moved in.
However i wasnt aware of the mortgage lenders requirements for a minimmum of 25K income for a BTL. He clearly wouldnt yet qualify for this.
Does anyone know if this is the case for all lenders?
This would make the whole thing a non starter...

Pixie5740

You'd probably be better off posing that question on the Mortgage & Endowments board.

Should your son so happen to get a job near this property once he graduates he would then have to get a residential mortgage before he could live in it. Him moving into the property one day won't necessarily mean that he would have no CGT to pay when he eventually disposes of the property.