My husband and I would like to gift money to our son so he can buy a house. We will sell a flat we own and add to it from savings. Will there be any tax implications? My husband is retired and receiving his state pension and I am a housewife. We are fortunate enough to be able to help him and he will repay us an amount each month, which will help us with living expenses. Upon our death any money owed will be cancelled as we will leave the property to him in our will.
Stephanie Parker, trust director at accountancy firm Haysmacintyre, says the first issue to consider is the tax implication of selling the flat. As this is not your own home, you will be liable for capital gains tax (CGT) on any increase in value since you bought it. You can deduct any costs incurred when buying the flat and any costs in the sale (estate agent’s commission, legal fees, stamp duty, for example), as well as money spent improving the property.
As you own the property jointly, you will be taxed on the proportion you each own. You and your husband each have an annual allowance against capital gains of £12,000, meaning the first £12,000 of gain is tax-free for each of you. Any gain over this amount is taxed at 18 per cent or 28 per cent. The amount of gain — when added to your taxable income — that falls within the basic rate income tax band (up to £50,000) will be taxed at 18 per cent and the balance will be taxed at 28 per cent.
If your husband’s income pushes his share of the gain into the higher rate tax bracket, it may be worth considering transferring a larger share of the property into your name ahead of the sale to minimise the tax paid between you. This can be done by asking your solicitor to draw up a declaration of trust. If either of you has lived in the flat as your main home, extra allowances may be available. However, if this is the case, restrictions to these allowances come into force next April so you should seek advice from a tax adviser.
With regard to making a gift, this will mean the value comes out of your taxable estates for inheritance tax purposes after seven years. If the arrangement is a loan, any value unpaid would still be included in your taxable estate on your death. If your expectation is that only part will be repaid during your and your husband’s lifetimes, it may be worth giving part as a loan and part as a gift. You should take advice on your inheritance tax position to see how this would affect you.
However, more importantly than tax, if you will rely on the repayments from your son, you should ensure that you protect yourselves by formalising the arrangement. Having your solicitor draw up a simple loan agreement may be advisable as this will mean that if your son faces any unfortunate circumstances, such as a divorce, there is no argument as to what the arrangement is.
Philip Munro, partner in the private client and tax team at law firm Withers, says there are different ways in which you could help your son.
It sounds as if your plan is to lend your son the money, rather than to gift it, and that the house will be acquired in his name.
The different options have different tax consequences and, to avoid any future disagreements, it is important that all of you are clear at the outset as to what is proposed.
It may be worth discussing the options with a solicitor or, as some relate to financial products, with a financial adviser. If you are going to lend to your son, it would be sensible to have a formal written loan agreement prepared.
If your son is also borrowing from a bank to fund his purchase, your loan should be disclosed to this commercial lender and his future repayments to you will need to be considered in that lender’s mortgage affordability calculations.
If you proceed with the loan, a key question is whether you are lending on an interest-free basis or not.
If you charge interest, this is a form of income that is taxable and would need to be reported in your tax returns, but if not then no part of the loan repayments will be taxable.
It is important that your wills deal with the loan. If you and your husband are lending jointly, I would imagine that the loan will continue in the event that one of you passes away.
Your wills should provide that, on the death of the survivor, this loan be written off to avoid the survivor’s executors being obliged to make your son repay the loan.
The outstanding balance of the loan will be within the scope of inheritance tax and will be included in the computation of the value of the survivor’s estate.
If the survivor’s estate exceeds the available “nil rate band” threshold, there may effectively be IHT to pay on all or part of the loan.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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Our next question
I am 38 and work full time, earning £50,100 a year. Last year I helped my husband with admin, for which his business paid me £1,800. Now HMRC says my tax code has changed. I am paid via PAYE but should I be filling in a tax return? We also claim child benefit for our son (my husband earns £35,000 and until last year I earned under £50,000). As I am now on over £50,000 will I have to fill in a return and pay tax on the child benefit? I also pay into a pension and once those payments are taken into account I am still below £50,000.