Buying a Buy to Let myself or gifting the purchase cost to my son for him to manage it

sgtbilko7

I've been considering purchasing a Buy to Let property. However, due to my age, I'm considering gifting the cost of the property to my son so he can buy it in his own name and manage the property himself. Am I right in assuming that I am allowed to gift my son the purchase cost as a lifetime gift without him incurring any income tax on this gift? He is self-employed and a lower rate tax payer (the potential rental income from the property would not propel him into the higher rate of tax). I understand that this gift could have inheritance tax implications but my total estate including this gift will be way below the taxable limit on inheritance tax. So even if I don't live another 7 years, I assume that no inheritance tax will have to be paid on this gift?

My son has never owned his own property, so if he was to buy it in his own name, he wouldn't have to pay stamp duty but of course this would mean he would then have to pay stamp duty on a house he may buy for himself to live in the future. More likely though, he will live in my house if he outlives me. If the buy to let house was in my son's name though, the house he inherits from me would therefore be his second house so if he was renovate the inherited house and sell it, he would have to pay capital gains tax on the difference in value between the probate value and the value of the house when renovated.

I'd greatly appreciate any advice - ultimately though, would it be more sensible for me to buy the Buy to Let property myself and for it to form part of my estate - will it more tax efficient for my son to inherit it rather than to receive the funds to buy the property now? I don't wish to complicate my son's affairs. In a nutshell, am I right in thinking that it will be far simpler for me to buy the buy it let property and to leave it to my son as part of my estate?

davidmcn

You haven't mentioned whether your son actually wants to become a landlord? You can always give him a gift and let him invest it in something else instead.

If he buys the property then he'll use up his first time buyer "virginity", so won't ever qualify for the SDLT concession for FTBs - and as you've pointed out, he'd have to pay additional SDLT for any further purchases.

No Income Tax payable on gifts, you're mostly right on Inheritance Tax (tax would be payable from the estate but would take into account lifetime gifts during the previous 7 years). Though if you don't think IHT is an issue, no harm in you keeping your money to yourself!

greatcrested

As David says you are basically correct in your understanding of the tax situation.

The bigger questions relate to whether

* a BTL property is the best investment for this money

* your son wants (and is able) to be a landlord

* you will (o may) have need of this money in future (eg for care costs?)

You should also be aware of the possibility of the gift being deemed 'Deprivation of Assets' in the event of means testing for care

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Post 9: Letting agents: how should a landlord select or sack?

sgtbilko7

Many thanks for the replies, much appreciated. My son actively wants to be a landlord but unfortunately does not have sufficient funds to become one himself. It is unlikely that he will ever buy his own property to live in due to his relatively low income so losing his first time buyer "virginity" is probably not likely to be an issue but it is possible that he will renovate and therefore add value to my house which he will inherit. So then if he sells it, he could be clobbered with a large capital gains tax bill if the buy to let is in his name. That said, in this case, would he be allowed to specify the inherited house as his main place of residence so if he sold it at a profit over probate value, he wouldn't incur any capital gains tax. I appreciate then if he ever sold the buy to let he'd have to pay capital gains tax on any profit on that property but this isn't really going to be an issue as he would intend to keep it to let and even if he sold it, there isn't likely to be much of a profit as the buy to let is a very low value property.

My son has always been keen on becoming a buy to let landlord, I have always viewed it as far too much hassle in the past but I feel quite vulnerable now having a relatively substantial amount of savings these days as interest rates are so low and I wouldn't be surprised if we see negative interest rates and substantial devaluation of currency in the future. Sorry to go off the subject, but I've even heard friends talk about potentially investing in tangible assets such as gold, silver or even classic cars so they have tangible assets in the future if the currency is significantly devalued in the future.

That's great to hear there is no income tax payable on gifts so I assume a gift would not have to be declared on his annual Self Assessment? I'm sure IHT won't be an issue as my wife and I's estate is well below the £650k combined threshold and that's not even taking into account the extra passing a house allowance over which I believe takes the limit up to £1m.

I totally agree that BTL may not be the best investment - there is the uncertainty of property values in the future, the potential difficulty of getting and managing tenants and the possibility of them losing their jobs due to the current situation and not being able to pay the rent. But as I say, leaving that sort of money in a savings account will see it effectively devalue as interest rates on savings are so low.

I also agree about retaining a fairly substantial amount of money for future security re: potential care costs. Again, I am very concerned about the potential devaluation of currency in the future but appreciate it would be very unwise to tie up every penny in a buy to let if money is needed for care in the future.

Thanks for pointing out the Deprivation of Assets - this is something I've not come across before. 

greatcrested

sgtbilko7 said:

..... My son actively wants to be a landlord ..................... it is possible that he will renovate and therefore add value to my house which he will inherit. So then if he sells it, he could be clobbered with a large capital gains tax bill if the buy to let is in his name.

whether the BTL property is in his name or not will not affect his liablility for CGT on the inherited property.

In any case, I'm guessing if the BTL was in your name, he would inherit that as well as you own home on your death?

That said, in this case, would he be allowed to specify the inherited house as his main place of residence so if he sold it at a profit over probate value, he wouldn't incur any capital gains tax.

yes, assuming it was his main residence! Does he live in it now with you as his main residence, or does he live elsewhere?

...

My son has always been keen on becoming a buy to let landlord,

I wonder if this is simply a dream based on stories from earlier decades when large profits were possible and relatively common? BTL is no longer either easy, nor so tax eficient. And if you read posts on this forum from the last 9 months since the Covid impact, you'll see numerous stories of rent arrears and the virtual impossibility of evicting tenants.

I have always viewed it as far too much hassle in the past a sensible view.... but I feel quite vulnerable now having a relatively substantial amount of savings these days as interest rates are so low and I wouldn't be surprised if we see negative interest rates and substantial devaluation of currency in the future. Sorry to go off the subject, but I've even heard friends talk about potentially investing in tangible assets such as gold, silver or even classic cars so they have tangible assets in the future if the currency is significantly devalued in the future.

apart from my comments above, the other drawback with property is its illiquidity. Even a classic car can be sold pretty fast if money is needed. A rented property cannot be.
....
I totally agree that BTL may not be the best investment - there is the uncertainty of property values in the future, the potential difficulty of getting and managing tenants and the possibility of them losing their jobs due to the current situation and not being able to pay the rent. But as I say, leaving that sort of money in a savings account will see it effectively devalue as interest rates on savings are so low.

the choice is not just between BTL and savings accounts though.
I also agree about retaining a fairly substantial amount of money for future security re: potential care costs. Again, I am very concerned about the potential devaluation of currency in the future but appreciate it would be very unwise to tie up every penny in a buy to let if money is needed for care in the future.

Thanks for pointing out the Deprivation of Assets - this is something I've not come across before. 

My instinct is that you should keep the money yourself for your own future security. Your son can (presumably will) inherit it in any case in the fullness of time. There does not even seem any benefit in terms of IHT on your Estate in giving it away.

If so, you should consider the various alternative investments eg buying an annuity; investing in funds, or gold (or that classic car!);

Why not look for sugestions on the investment board here?

xylophone

Would it be worth considering lending the money (this could be with or without interest) to your son to enable him to buy a home of his own in which he would live?

You would see a solicitor about drawing up a proper loan agreement and taking a first charge on the property.

If your son paid you interest you would need to report this to HMRC.

There would be nothing to prevent your son from improving his own property and selling it for a profit in the future.

sgtbilko7

Thanks again, it is good to hear my son wouldn't be liable for CGT on any 'profit' made on the inherited house after renovation even if the BLT was in his name, as long as the inherited house is his main residence. Yes, he currently lives with us in this house and he has for some time, it is his main and only residence. If my son outlives us, would if he have to declare that the inherited house is his main residence to HMRC?

Yes, that is correct, my son is the only beneficiary in my will after my wife so if the BLT was in my name, my son would inherit this as well as the main residence.

I totally agree that BLT, like many ventures, is nowhere near as profitable now as in previous decades. My son is just concerned that we would be lucky to get 1% interest on our savings whereas at the lower end of the BLT market, we have seen a few flats for around £90k that generate a monthly rent of over £400 so this would potentially provide a yield of over 5%. The other thing is that should currency be devalued in the future, the flat would be a tangible asset. Rent arrears and the virtual impossibility of evicting tenants due to the current situation is a massive worry though. Originally, I thought it best for my son to manage the property but now we both agree it maybe best to appoint an agent but this naturally cuts into the income and I'm sure that rent arrears and evicting tenants could be an issue whether an agent is managing the property or my son.

Illiquidity is a major drawback of BLT but as I say, I would definitely retain a significant amount of savings in case they are needed in an emergency or for care. 

I probably need to look into alternatives to BLT and savings, my son and I were very badly burnt by investing in shares in the past though so I don't think this would be an option and ideally I'd like to invest in something tangible in case of currency devaluation in the future. 

I clearly need to do a lot more research into BLT in my area - I've noticed that most BLT properties under £800 a month seem to be snapped up very quickly by tenants but appreciate that there's no guarantee that I will be able to rent out somewhere I purchase.

Up until the current situation, I'd whole heartedly agree about keeping the money for my wife and myself's future security but I am quite fearful of currency being devalued in the future to the point whereby it's value will be almost worthless by the time my son inherits it - no one knows what's around the corner but it is possible my wife and I could live another 10 years. I am quite worried that the current situation could lead to hyperinflation.

That is very true that there is no benefit in giving the money away before my death - well I guess there would be if my son knew of something lucrative to invest in but BLT clearly isn't it necessarily the best way to invest these days.

I will look into suggestions on the investments board, many thanks for that. My son has carried out a lot of research on the classic car market but I'd be quite wary on investing in them as I'm not sure how they will fit into things when we are all made to drive electric cars! The trouble with classic cars too is that they cost so much to maintain so while some have rocketed in values in the last few years, their owners have probably spent a fair chunk of the 'profit' on upkeep and maintenance of them.

Many thanks again, I much appreciate all your input.

eddddy

sgtbilko7 said:

we have seen a few flats for around £90k that generate a monthly rent of over £400 so this would potentially provide a yield of over 5%.

If £90k is the very bottom end of the housing market where you are, you might find that the flats are in poor condition with high maintenance/repair costs, and some landlords would say that letting at the bottom end of the market is much more problematic and riskier.

greatcrested

sgtbilko7 said:

.... we have seen a few flats for around £90k that generate a monthly rent of over £400 so this would potentially provide a yield of over 5%.

You are assuming 12 months rent every year. You should calculate based on 10 months, not 12.

Then 12.5% agency fees.

And £500 - £1000 annual costs.

That might get you closer to a gross figure.

The online calculators are far too simplistic.

Then of course you £90K purchase price has ignored SDLT, legal fees, survey cost, not to mention the costs required to redecorate/ renovate etc to set up the property for letting.

5% gross?? I doubt it.

steampowered

SDLT is the killer. If you gift your son a property now:
- He will have to pay higher rate SDLT when he buys a property of his own. Higher rate SDLT is 3% of the property value on top of normal stamp duty.
- He will forfeit first time buyer stamp relief. 
- He will no longer get the 25% top-up from the government on house deposits in a Lifetime ISA. This is worth £1,000 per year.

That makes this plan a really bad idea. You should wait until your son owns a property before you gift him this one. In the meantime, you can gift your son the rent you receive.

Or, you can sell the property and gift your son the cash. He can then use that to fund the deposit on his own property, or to top-up his pension so that he has a decent retirement.

As your estate is below the inheritance tax threshold, there is no rush to gift the property now. You can leave the property to your son in your will. 

p00hsticks

sgtbilko7 said:

I totally agree that BLT, like many ventures, is nowhere near as profitable now as in previous decades.

Well the impact on Brexit on the importing of Danish Bacon, not to mention lettuce and tomatoes, which I believe we mainly get from Spain, may well change all that ;-)

(Apologies, OP but I couldn't resist - it's been distracting me through this thread!)