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Letting Property to your children: Make sure you get it right!

By admin
29 Feb 2024
Manage Tax Risk

I was asked a hypothetical question last week regarding the tax implications of a parent buying a property for their child to live in during their university years.  In summary:

  • The parents already own property and did not want to suffer the SDLT surcharge on acquisitions of second properties
  • Neither did they want to suffer CGT on the eventual sale of that property
  • Their solution was to ‘gift’ their child the cash to pay (in full) for the property – the child is a first time buyer, therefore no SDLT liability arose, and full PPR relief would be available to exempt any capital gain on the sale
  • The parents are charging their child (less than market) rent for the occupation of the property and expect to receive the full value of the proceeds on sale

Firstly, the parents have made a Potentially Exempt Transfer (‘PET’) for inheritance tax (‘IHT’) purposes, meaning their estate may suffer IHT on this gift in the event of their death, if this is within seven years of the transaction.  There is also a risk that the gift may be subject to the ‘pre-owned asset’ tax if the parents continue to benefit from the asset purchased with the gift – the most common example would be if the parents occupied the property but the rules could also apply if they are receiving rents or proceeds of sale.

At first glance, it may appear that the child is in a financially better position as they are paying lower rent than they otherwise might expect to, but they have now lost their first time buyer status and will therefore pay a higher SDLT in the future. 

The ‘rent’ paid to the parents is not taxable income – they do not own legal or beneficial title to the property and therefore cannot be assessed on any income arising from its letting.  Neither is it a return of capital, as there’s no formal loan agreement between the parents and the child. 

It is more likely that the rent would be considered a PET for inheritance tax as the child has made a transfer of value from their estate with no legal (or other formal) obligation to do so.  The payment of the full proceeds would also be considered a PET and the child should ensure they keep a record of such amounts to ensure their IHT is correct in the future.

To avoid this ambiguity, the parties could have entered into a formal loan agreement, with the ‘rent’ payments simply being a return of capital.  If the parents had charged interest this would constitute taxable income and on the assumption that they’re higher/additional rate taxpayer, this may not be desirable.

Not all cases are as complicated (interesting?) as this, but it is important to think about your obligations if you are a parent charging rent to your children – whether it’s while they are living with you, or you have purchased a property for their occupation.

Rent-a-room relief is available to landlords with lodgers in their main residence.  The amount of tax-free income able to be earned (£7,500) is per property, not per tenant or landlord (of property is owned jointly) and prevents the need to undertake complicated calculations in relation to personal vs business expenses incurred in running the main residence.  In addition, it does not affect the availability of Principal Private Residence relief when the owner comes to sell the property.

Many parents purchasing a property for their child’s occupation will choose not to charge a full market rent– either out of generosity, or because they do not want taxable profits.  If rents are not considered commercial, expenses are restricted to the value of the rental income such that losses cannot arise (which could reduce rents earned elsewhere).

The above example is a good demonstration of why tax isn’t as simple as HMRC would like to make out – every transaction has multiple implications and it’s always a case of weighing up short and long-term risk vs benefit.  Added to which, tax legislation changes every year so it’s important to regularly monitor your affairs.

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