Buying advice: Tax; Family; 2nd Home etc

Notnefmail

My Gran sadly passed away recently and I came into an inheritance (£50-100k).
My father (her son in law and not a beneficiary in the Will) recently retired. He served in an industry where saving in a personal pension wasn’t commonplace and wishes to keep himself busy during retirement.  He’s very handy with house/ renovation work.

I’d really like to help him buy a property with the intention of developing and selling it - not huge money but a modest profit to help
his financial position.

I’m a higher tax bracket earner whereas my father of course now has no income.

I’m well-versed with investments and am 100% focused on this approach (sorry trolls).

there are some kind and bright sparks out there and it would be great to have your thoughts on how best to approach this.

options I’m currently considering are:
1) personal loan with a charge on the property at sale
2) operate through a corporate as joint directors and only pay one director a dividend

all warm and constructive comments will be greatly received.

Notnefmail

Bump if possible

oldbikebloke

what is your objective?
- income on your investment?
- capital return, no income?
- both?

"help him buy a property" is slightly confusing as will you be a sole or co-owner or will your involvement be limited only to providing funds to him and he will be owner?

His activity means it would certainly make the business a "venture in the nature of a trade", so profits on sale will be subject to income tax, not CGT if unincorporated trading entity
 
option 1) 
for the sort of property development activity you are considering, "trading" helps as makes claiming costs against profits much simpler. 

You would however need to decide what trading entity you want with FIL - him or you as sole trader? If you, all profits are yours and he would be your employee (which requires a payroll operated under PAYE - so costs incurred). If him, your involvement would be that of funder with a claim to any "profit" being limited to whatever your loans terms are (documented of course!)
Alternative is you both share as a formally constituted partnership  - needs documented profit share agreement and partnership tax returns & accounts, and each person also doing their respective tax return on top 

as it would be trading:
- income tax on any interest charged on loan.
- income tax on any profit (gain in value) 

If sole trader in FIL's name, any money taken by FIL for his labour on the project as a "salary" for his work would be disallowed for profits/tax calculation as you cannot claim own labour as a cost for obvious reasons. If he was your employee then it would be a cost against your profits.
For partnership, own labour rule applies 

option 2 
admin effort and cost of establishing and running a company?
you would need to both be shareholders but with different classes of share and so dividend entitlement

would be more tax efficient for FIL to receive as dividend (not salary) if he has other income that makes him a taxpayer in retirement anyway 

sale profits subject to corporation tax and if profits then taken out of company, would be exposed to respective personal tax positions - for that you'd probably declare equal dividend and each pay personal dividend tax on your profit distribution

trading as a company would defer your own own tax position if you expect to seek a return on the investment as a share of profits, since you'd simply not take your money out of the company until your personal tax position is better 
alternatively, if you simply want to get your share of the profit as soon as it is sold, a company offers little advantage to you 
 

[Deleted User]

The company will attract the higher rate of SDLT but that might happen anyway with option 1 if father owns his own property already. 

AdrianC

Why complicate it?
Lend him the money, put a charge on the property. End of.

Notnefmail

oldbikebloke said:

what is your objective?
- income on your investment?
- capital return, no income?
- both?

 

Great reply and hugely insightful thanks!

First, can I check ... FIL = Father in Law?

He’s just my straight up father (Gran from mum’s side) if so. May make a difference (gifting to family members?).

The objective would be for him to develop and flip a small handful of houses over the first few years of his retirement (he has no other income, so a modest gain on each would be adequate) before eventually investing to let the small portfolio. I’m fully aware of the implications and responsibilities involved with landlorship, as is he (I know it’s a delicate topic on this forum).

I’m fortunate enough to have a good income not to need the capital, nor the income currently - however the intention would be that any assets would revert back to myself (likely upon death but potentially before), which id anticipate to be governed by an amended Will (?).  Worth noting the portfolio is unlikely to amount to £325k+ or whatever the inheritance tax threshold stands at now. Although I assume could still accrue CapGains upon sale (?).

oldbikebloke

Notnefmail said:
First, can I check ... FIL = Father in Law?
He’s just my straight up father (Gran from mum’s side) if so. May make a difference (gifting to family members?).

oops, yes, I skim read: father her son in law 

Notnefmail said:

The objective would be for him to develop and flip a small handful of houses over the first few years of his retirement (he has no other income, so a modest gain on each would be adequate) before eventually investing to let the small portfolio. I’m fully aware of the implications and responsibilities involved with landlorship, as is he (I know it’s a delicate topic on this forum).

I’m fortunate enough to have a good income not to need the capital, nor the income currently - however the intention would be that any assets would revert back to myself (likely upon death but potentially before), which id anticipate to be governed by an amended Will (?).  Worth noting the portfolio is unlikely to amount to £325k+ or whatever the inheritance tax threshold stands at now. Although I assume could still accrue CapGains upon sale (?).

obviously I am not under any circumstances "recommending" what you and he should do... 

if he were a sole trader and you have a loan (secured by charge) on properties he owns (ie you have a private mortgage) would that provide sufficient funds for him to:
a) buy a property in the first place; and
b) have working capital to do the job?
or would he need to get further funding from a commercial lender? If yes, that may limit his access to commercial funds.

As a sole trader all the risk and rewards would be his, your loan would be covered by the charge, but your return would be based on the loan terms, for example: principal repaid on sale and a) annual interest rolled up and paid on exit or b) % of profits paid on exit instead of interest. As far as i can see on the info to date, you would not have a "stake" in father's subsequent rental profits as you would have no entitlement to them, not being an owner of the portfolio, merely is funder. Your investment return would thus be related only to the loan 
You would be liable to income tax, father obviously would pay income tax on his profit (and NI if not age exempt) with rates depending on the personal tax thresholds obviously.

Upon his death as a sole trader, and with a will in your favour, your inheritance would be whatever his estate comprised - it may include properties he owned at the time and of course that estate may, or may not, be into IHT territory.
There is no CGT on death, so you may, or may not, get a "win" on his death in terms of inheriting money totally tax free.
The business as an entity on its own would die with him and so of, and in itself, the business has no saleable value so would not impact his estate value

as a formal partnership your stake in the business converts from property development to property investment when the properties commence letting and so you would remain entitled to receive whatever profit share you and have agreed. Profit shares can of course vary year to year but I suggest you seek professional advice on setting that up and especially what would happen upon death and/or liquidation/business failure.

as a company A key start point is would external funding be needed? Harder to get for a company with no trading history.

Given father has no other income (at all, really?) then a company may be more tax efficient for him if the annual profits are greater than his personal allowance, as he can then mix his income between dividends and salary in the best combination (which may be 100/0 for example)

I will assume you will be a shareholder (can't be bothered to game other options). As shareholder, the company route offers risk of total loss if company fails, but if successful, it would shelter your "investment" from personal tax for as long as you do not take any money out of the company for you personally.
As your stated intent is "in the future, and possibly before death" to get a return on your investment, a company would enable you to manage that timing better in terms of tax exposure before then. Crucially, you and father would need to agree an exit strategy since your "investment" is represented by the shares, not the cash, so exit might wreck the company (eg. de-fund it) or leave it viable for him to continue in business.
- declare exceptional dividend funded from property sale, you pay one off big personal tax bill - ideally when you have dropped to lower tax bracket?
- run down company cash balance by taking unequal annual dividends favouring you? you have personal annual tax bill which may be in a period spanning a change in your own tax bracket.

when he dies, and with a will in your favour, your inheritance would be the shares. I suggest the executors of his estate will need professional valuation done for the company, as it may be more than the sum of its property assets if the company has a "name" (aka "goodwill") by then as a success in its own right. How you get the money in that circumstance then depends if you have a controlling interest and could, for example, decide to liquidate the company - company close ("winding up") has many options for tax efficiency but this post is long enough already so i will say only this  - it can be done in ways that result in CGT and /or income tax so may, or may not, be tax efficient for you given separate CGT allowance on top of income tax one

Can I strongly suggest you and he get professional advice (accountant) as there are a huge number of other factors that need to be considered when tax planning, especially where a person has low income and may be of an age where other taxes (eg national insurance) are not relevant any longer. It is the totality that matters, not just answers to "flip a property" question

In contrast, if you foresee the total eventual portfolio being only <£325,000 then it suggests the sort of properties you are thinking of property developing will have have negligible potential margins for a business run by people with no background in development and so high risk of total loss. I agree once at the property investment stage a rental portfolio may be more resilient, but again for that sort of property price you can go off and game the risks yourself that you must already be aware of in terms of poor yields, voids, no rental due to dispute and damage losses