Money Moral Dilemma: Is it wrong to invest my children's savings in a property for them?

howdy99

My daughter inherited some money when she was 11.  I put this money in to a house for her although she wasn't keen at the time.  It was put in trust for her and was then put in to her name when she was 18.  Because I had my own house the extra 3% stamp duty had to be paid, so she's never been able to get her first house free of stamp duty.  She's also not been eligible for savings account which help you to save for your 1st house which give good interest rates.  Even with these negatives it was still a good move.  The rent was put in to a savings account for her and the money paid for her University fees etc.  So even though at the time she wasn't keen on a house being bought for her, now she feels it was the best decision. 

Treva

My unqualified advice for what's its worth!

My son is 16yrs in August 2013. I'm a landlord too but I don't want to ruin my sons chances of making his own choices. Therefore I have decided the best way forward is to do the following.

1) Put some savings for him into an adult ISA when he is 16yrs old if the rates are favourable.

2) Then ADVISE him to drip feed £4,000 a year into a LISA when he is 18 yrs old.

3) Then ADVISE him to buy a property in his own name as a first time buyer when he can afford
to.

4) He could rent the property out when he has lived in it long enough for it to be tax advantageous.

5) I can help him along the way with any further gifts of money and hope I live another 7 years at least after so he has no tax to pay on the gifts.


My above solution leaves my son in control of his own destiny and avoids any remorse later.

We would hopefully have a man to man chat about the implications and options at the time but the choice would be his alone all along the way.

The LISA, (Lifetime Individual Savings Account) would give him 25% free plus the interest earned on the LISA. I'm pretty sure that inflation, including any property uplift would have a good chance of not reaching an uplift around 28% a year with compounded interest. He also has the choice of taking it out and spending it but will have to pay the free money back if not used on buying a property or taking it out at age 60yrs as a pension. So assuming he takes out cash within the NIL rate tax band allowance at age 60yrs he could have the free money to spend until he reaches state pension age. Paying back the missing NI contributions within the time frame allowed so as to give him a full state pension at age 100yrs by then or has not moved to France and retired at 62yrs old. This also assumes he already has inherited my own home, which is mortgage free to live in or sell as a main home had he taken the LISA as cash at age 60yrs and not become a second home owner.
He could then rent a room in the inherited property under the tax free rent a room scheme or rent it out totally rather than sell it after it became tax advantageous to do so as a main home and avoid capital gains tax. Inheriting my home would also mean no stamp duty land tax fees as with a normal purchase.

My rental property and present property with also be tax free when he inherits them and they would hopefully fall within the inheritance tax threshold but if not he would have a bit of tax to pay reluctantly. Now he would own three properties but would have to pay tax on any rent after running costs other than income from rent a room tax relief on the main home whist he was still living in it of course.

Better then me as I started with nothing. Having said that in those days you could get tax relief not only on a mortgage but also on a home improvement loan too. Also there were grants in certain areas were councils would give out free money to improve property in run down areas and if the property was owned by the council you would get it a silly low price. You could buy it cheap property have free repairs and sell on or rent it out. However, as the country in effect gets poorer there are few benefits to be had and tax relief has been reduced in real terms by keeping NIL rate band the same or as in the case of capital gains tax relief vastly reduced as well as state pension age increasing and inheritance tax relief reduced reduced in real terms as it has also stayed the same.

However the younger home buyers are still in with a chance. But please don't patronise the poor things by saying why can't they achieve what you did, it's not that easy. Especially if they have university loans to pay off, assuming they can't get a higher apprenticeship where the business owner pays for university fees plus some pay in addition.

Dave-o

I have often thought of doing similar and don't see an issue as long as tax / inheritance implications are understood (which I don't quite understand!). 
My question is: where on earth can £10k deposit get you an investment property at current mortgage requirements? If it can, I'm in!

gloriouslyhappy

I have two kids who each have a child savings account, and I've saved a total of £10,000 for them. I have three buy-to-let properties, and am thinking about investing their money in a fourth, as it will work it harder for them. I'm aware it's their money, not mine, and they wouldn't be getting a say in how their savings are invested. But this way I'll pay them back much more than they would otherwise have had when they're old enough to use the money. Should I leave it where it is or invest it?  

I think the B2L is a good idea, obviously you're going to spend more than £20k on it, but once the children are old enough, you can buy out their share and give them the cash, or by arrangement give them their portion of the monthly rental income as a nice little steady income stream.

I'm saving money for the younger family members (I don't have my own children) but it's in a separate account in my name, and they don't know about it. So if they need it for uni fees or a little runabout car or suchlike, I'll give it to them as a surprise. If they turn out - sadly, as one already has - to be spendthrifts and nasty characters you wouldn't want for a neighbour, then my money stays in my savings account.

999pez

Seakay said:

It's not the savings your children have made, it's your money in a tax advantageous account which you were able to open using their names.
If you choose to invest your money in another way which is even more advantageous for you, you may risk being prosecuted for tax avoidance.

You're confusing tax avoidance with tax evasion. You can't be prosecuted for tax avoidance but you can for tax evasion.

Mandy_Caddy

MSE_Kelvin said:

This week's MoneySaver who wants advice asks...

I have two kids who each have a child savings account, and I've saved a total of £10,000 for them. I have three buy-to-let properties, and am thinking about investing their money in a fourth, as it will work it harder for them. I'm aware it's their money, not mine, and they wouldn't be getting a say in how their savings are invested. But this way I'll pay them back much more than they would otherwise have had when they're old enough to use the money. Should I leave it where it is or invest it?  

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I would buy a property, and either let it sit there and just maintain it (as it will increase more in value than their savings will), or let it out and knock the profit from the rent money off the mortgage. Then, when the time comes, you can either sign over the relevant % to them, or sell the property and pay them their share.

jasdev

I've not seen this mentioned in the preceding four pages, but ask yourself this: if the value of the property bought in your childrens' names decreases in value, either by a little or by a lot, and at that same time they turn 18 years old and need the money for a very reasonable thing, would you be willing and able to sell up, give them the lower value from the sale of the property, then make good using your own cash for the loss incurred through your own actions with their money?

honestcove

Very interesting question with complicated considerations.
I’ll take the question as: “can I as settlor and trustee of my children’s money change that money from savings to part of a highly leveraged investment product?”
Lots of considerations but here are just a couple:

Trust law would (I guess) not allow you to place the risk of leverage onto the beneficiaries I.e. their money could erode to zero but not leave them with a liability. You would have to take all the investment risk (income and capital) - which I assume you would be happy with. If when you settled the money, your intention was to use the money in this manner or in a variety of manners as befits the moment then I see no problem - moral or legal - with your plan now.

If you don’t actually need their cash to make the new investment, or you are content with the number of investment properties held, you could as an alternative give them an option (at whatever age you think they are able to make the judgement) to exchange their savings cash for an equivalent value of part or all of your investment portfolio.

datimms

If, this is a real question, then asking it to a money saving forum shows a certain lack of sophistication in regards to property investment. Not that I can talk! but there is the question of whether you are likely to do better in your investments than say, an index fund investing in the stock market. The question implies you will be co-investing with them as it's not enough to buy anything of quality. Assuming the other BTLs are profitable and you will invest with good rental cover, in a good capital growth area and the kids are under 8 (to allow minimum 10 years in the market), I would:

Speak to a specialist property accountant who also invests. And ideally someone who can also explain the HMRC implications of whether it's your money or the kids', because it might be in their name but if you benefit, HMRC will collect from you.

With a view to either invest their savings in shares of a LTD company (owned and directed by yourself), which invests in property. I understand you can structure the shares in a way that negates any of the negative points previously mentioned and leaves you clear, (loosely called a family investment company). Or treat their savings as a loan, pay them interest etc but again I think you'd need a LTD co. Then save enough of your own money on the side to either buy out their shares or repay the loan if they decide they want the money at 18. They might be quite happy with the relatively significant income by that age, which will surely beat any pocket money or weekend job.

If the kids are 8-12 i'd probably still do the above but there's less time 'til they are 18 for the property market to do its' thing. If 13+ (and once they reach that age if you did this younger) I'd probably involve them with the gentlemen's agreement they won't cash out at 18.