Second house – set up a business or deeds in sons name?

wilsons

Try this one for size!!

Brother is at university. Dad bought a house close to the university (he’s put 4 of us older children through and is sick of paying rent!) and he’s going to have my brother in it with three others. Now he had to re-mortgage this own house and it’s currently in his and mums name. The burning question is how the dickens can he reduce the amount of tax he’ll have to pay on the rent he receives!?!? He’s thought of a few lines and I’m hoping you chaps can informs us which is the best route to go down!?!?

Option 1: Dad puts it down as a business, in that he’s the landlord (and can claim back maintenance costs etc?) Problem is he already has a second job as it is. Would this third source of income be a problem?

Option 2: Put the house in mum’s name and she can be the landlady as in option 1? Mum works part-time.

Option 3: Put the house in my brother’s name?

Obviously if there is an option 4, 5 and 6 that are better, I’d love to hear them!!!
Thanks so much for the help in advance…

sneekymum

Put house in all children's names. This gives Capital Gains Tax exemption times many for eventual sale. e.g. this year's CGT exemption is £8,500 - if there are ten siblings on the deeds the house could be sold this year for £85,000 more than the original cost with no tax to pay.

It would also get round some Inheritance Tax - there's no point in wasting the threshold leaving it all to a spouse.

As for tax - income split between many makes the maximum use of the personal allowances.

Cook_County

The classic planning here has always been to put the house in the occupying child's name so that he can get PPR relief on sale and rent-a-room relief.

HOWEVER, I would be wary today of creating such a structure if there is any danger that the pre-owned assets rules might come into play depending on the family's long-term uses of family money.

I would take advice from a solicitor, CTA or accountant familiar with the POA rules before doing the deed.

Chipmunk493

There are a lot of aspects to these options.

For example - if Dad has the property and pays a mortgage on it, the Revenue treat it as a "business" and you then can claim the interest Dad pays as a tax deduction against the rent. However, if the property is in the children's name, interest relief may be challenged and also may be harder to have the mortgage in the first place.

If the "owner" of the property also lives in it as his main residence, an element of "principle Private residence" from CGT is available - broadly the period you occupy the property is exempt from CGT whilst no other property is treat as your PPR. Plus the last three years of ownership as well.

There are lots of aspects - IHT and previously owner assets have been mentioned, but what is the level of your parents' income? What are their other assets' values (IHT purposes)? It is dangerous to give advice (and to take it) without knowing the full picture here. Sorry to be a jonah on this but I see too many well-intentioned schemes go awry as there was a major fact that wasn't mentioned

You really do need specific advise from a Tax Adviser on this. Before you do, however, help them by having a long term plan of what you want to do with the property, what the likely income will be, etc etc. This will save the adviser time. This is too complicated for me to give you all the answers here

I would however give you this warning on council tax:

Student accommodation is exempt from Council Tax whilet it is occupied by students. When one of them graduates - if tehy stay on in the house, it is no longer exclusively student accommodation and it falls liable to council tax again. Just watch out on that.

Good luck

MarkyMarkD

If you want to offset the interest, then it needs to be owned by the borrower - one of the parents. If your parents have the loan and the children have the asset, I can't see the interest being recoverable. If it's owner-occupied, "rent a room" tax relief on the rental income will apply, but the interest won't be offsettable against any surplus income.

It's quite a complicated situation - I should follow Cook's suggestion and get some professional tax and legal advice as this could be an income tax, CGT and/or inheritance tax minefield.

wilsons

Thanks guys. I'll pass the info onto my dad.

Thanks again...

wilsons

Think we’re gonna put the house in my brothers name and get the rent a room relief and plus his personal allowance should give a margin of over £9k?? One question though, the house will be in brothers name, but the mortgage in my dads (albeit for the house he lives in (remortgaged his own house)), but how does he explain the money coming in from my brothers account to his every month? i.e brother lifts rent off flat mates, puts it into his account, then transfers it to dads account to help cover dads mortgage...

Thanks again…

Cook_County

Dad may find he pays tax on this under the pre-owned assets rules introduced by Mr Brown last year.

The gift could also be ineffective for IHT purposes for tax and so potentially chargeable to IHT on both dad's and brother's death.

I would take advice rather than rely on a free open bulletin board...