Second home/ use by son- implications?

baj25

We are looking to buy a house in Scotland. We already have a house in England which would remain our main residence, it is mortgage free, and we would be cash buyers on the house in Scotland. Our son lives in Scotland and the idea is that he would live in the house (as main residence), all bills would be in his name, and he would pay us below market rate rent, while we would probably live there for one or two months a year as well. A nice arrangement for all concerned on the face of it.
I'm aware of the 4% tax on second homes in Scotland, and other costs associated with purchasing. From research on this forum, it looks like we'd have to pay income tax on any rent our son paid us (we are both basic rate payers), even though it was an informal agreement. Any other legal/ tax/ other implications we need to be aware of? TIA, Brian

foxy-stoat

Maybe CGT when you sell, if you sell for more. I do not know the law in Scotland but you would probably need to meet all the obligations being a Landlord.

Tom99

What if your son becomes the legal owner, you just put up the finance secured with a charge on the property. Your son can pay interest on the loan which would be taxable but that may avoid the extra 4%.
However if the repayment of this mortgage was based on the property's future value the +4% will probably still kick in as you would effectively have a beneficial interest in the property.
When your son sells there would be no CGT as it has been his principle residence.

davidmcn

Tom99 wrote: »

What if your son becomes the legal owner, you just put up the finance secured with a charge on the property. Your son can pay interest on the loan which would be taxable but that may avoid the extra 4%.
However if the repayment of this mortgage was based on the property's future value the +4% will probably still kick in as you would effectively have a beneficial interest in the property.

A loan would be fine from an LBTT point of view. No such thing as "beneficial interests" in Scotland, though LBTT is a bit stricter on anti-avoidance.

hazyjo

baj25 wrote: »

From research on this forum, it looks like we'd have to pay income tax on any rent our son paid us (we are both basic rate payers), even though it was an informal agreement. Any other legal/ tax/ other implications we need to be aware of? TIA, Brian

There's no such thing as 'an informal agreement' if he's paying rent, so you would have to meet all LL's obligations.


I presume you would simply be 'his guests' when you stay (would there be a rent reduction for this, or is it all part of the 'reduced rent', meaning the reduced rent would be for the inconvenience/hospitality rather than the fact you're renting to family?).


Am also only presuming this applies to Scotland.

xylophone

Could you not just lend your son the money to buy the property in his own name? He could repay with interest at an agreed rate and you could take a charge on the property?

Presumably he would be happy for you to be his guests for a few weeks each year?

baj25

Thanks for replies.
The logic for having the property in our name, and therefore paying the 4% tax, is in case he gets into a relationship that ends in a split, with partner getting half the property. That would be quite a financial hit to us, so the 6-7k tax is insurance against possible 80-90k hit in the future.
I find LL obligations and tax on rent slightly odd, though we'll do what we need to do. If you have a grown up child living at home (or in 2nd home), how many parents would honestly meet LL obligations or declare any contribution to household that kids made to them?
Good point re being guests, something I have pondered over. I think our relationship is such that we would be OK, but appreciate that if he meets someone in the future that may change, something we'll have to face as and when.
Thanks again.

[Deleted User]

baj25 wrote: »

Thanks for replies.
The logic for having the property in our name, and therefore paying the 4% tax, is in case he gets into a relationship that ends in a split, with partner getting half the property. That would be quite a financial hit to us, so the 6-7k tax is insurance against possible 80-90k hit in the future.
I find LL obligations and tax on rent slightly odd, though we'll do what we need to do. If you have a grown up child living at home (or in 2nd home), how many parents would honestly meet LL obligations or declare any contribution to household that kids made to them?
Good point re being guests, something I have pondered over. I think our relationship is such that we would be OK, but appreciate that if he meets someone in the future that may change, something we'll have to face as and when.
Thanks again.

It doesn't matter what other people do, tax evasion is tax evasion and landlords in Scotland have far more legal obligations than their English counterparts.

I understand your logic of wanting to protect the property from any future partners but I don't understand why you are persisting with your way when a private mortgage arrangement would do that in a much more tax efficient manner. A partner would only have a claim if the partner could prove (s)he had made some financial contribution towards the property such as paying the mortgage or paying for improvement and repairs to be carried out, or if maybe if the partner was a spouse or civil partner but would a spouse/civil partner really want to rent a property from the in-laws forever. Furthermore, courts in Scotland disregard pre-marital assets during divorce proceedings including property if it wasn't purchased during the marriage or before the marriage for use by both parties as a family home and this property will be neither.

AdrianC

baj25 wrote: »

The logic for having the property in our name, and therefore paying the 4% tax, is in case he gets into a relationship that ends in a split, with partner getting half the property. That would be quite a financial hit to us, so the 6-7k tax is insurance against possible 80-90k hit in the future.

No, because it would be him "taking the hit" in the event of a relationship split, since it would be his property.

I find LL obligations and tax on rent slightly odd, though we'll do what we need to do.

No, not at all. You will be his landlord. He will be your tenant.

If you have a grown up child living at home (or in 2nd home), how many parents would honestly meet LL obligations or declare any contribution to household that kids made to them?

The difference is that a child at home is living as part of the same family unit in the same household, not renting a property to form their own household in a different part of the country.

If a random Scottish kid was paying rent to live in your spare room, they would be your lodger and you their landlord.

gld73

Asides from the 4% LBTT, Landlord obligations in Scotland are more onerous that in England - you need to be registered with the local authority (that part's easy and not too expensive), and get the Electrical Installation Condition Report done (and PAT if relevant) That can be expensive, depending on what, if any, upgrades are required. Smoke and Heat detectors are also required to a specified standard. Gas certification is the same as for the rest of the country.

(Doesn't matter who your tenant is, related or not)

baj25

Thanks for further replies.
No deal is done yet, I'm trying to find out the issues/ implications involved so that we can make informed decisions about what to do. I've learned a few things from your replies which have helped.