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bigduckontax
bigduckontax, Accountant
Category: Tax
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We have a 2nd property that we rent out. We also have a mortgage

Customer Question

We have a 2nd property that we rent out. We also have a mortgage on this property, which the monthly rental basically covers. We complete annual self assessment forms and include this rental income and associated costs and pay additional tax on the "profit" that is made. We have 2 children, one who is 4 and the other just over 1. Can we a) transfer the ownership of this rental property to them and b) if so, do they off set the "profit" made against a tax allownance?
Submitted: 3 years ago.
Category: Tax
Expert:  bigduckontax replied 3 years ago.

Hello, I'm Keith and happy to help you with your question.

 

I do hope you are claiming the interest element of the mortgage repayments as an expense against the rental income; it is allowable.

 

Inheritance Solutions UK give the following advice which sets out some of the unexpected pitfalls into which you could fall. I recall once a case where this was done and in the longer term Mother wanted her house back and agreed to pay her sons's Capital Gains Tax (CGT) bill. It cost her 80K in tax to get her own house back; ouch!

 

'First it is important that you understand the risks of transferring property into a child’s name. The first risk is loss of control: If you transfer your property into your child’s name then you will no longer be the legal owner of the property. Therefore, if you decide that you wish to sell your property you first have to have the agreement of the new owner in order to do so. Additionally, if they wish to sell the property, they will be able to do so without your permission.

 

The second risk is outside parties: You must also consider the possibility that your child may have an issue of their own, for example divorce. Your son or daughter’s soon to be ex spouse would have a legitimate claim against their estate which would also include your property. If your son or daughter had an issue with bankruptcy the property would also form part of the estate. This would potentially be claimed by any creditors seeking to realise money from their estate in order to repay monies owed to them.

 

The third risk is capital gains tax: This is more of an issue for your children than you but it is an issue nevertheless. Capital gains tax is charged when an asset that is classed as an investment goes up in value. If your children are not living in your property when you transfer it into their names it will be subject to capital gains tax when they come to sell it.

 

This means that if the property increases in value after being transferred over to your children, they may then be liable to pay tax on it.

 

The fourth issue is avoiding residential care fees: The most common reason that clients have of wanting to transfer property to their children is to avoid having to sell their home to pay for care fees. Transferring property to your children like this does NOT protect your home. Often this is classed as a gift with reservation. This is where you have made a gift but have reserved all the rights over it and so if care needs were to a rise this gift would be seen as an attempt to avoid paying for care. Therefore the property would be considered as part of your estate and used to fund your care fees.

 

' Having said all that, yes you can make a transfer. the recipients would have their personal allowances to offset the rental income, but this would be of little significance if they were themselves in receipt of other taxable income.

 

The ages of the children is a problem and you would probably need to set up a trust to look after their interests. This in itself can be a highly expensive exercise tax wise and it is essential that you take formal, professional advice in this matter.

Customer: replied 3 years ago.

Thanks for this. My children are 4 and 1 respectively, therefore a) they dont have any other income and b) they aren't able to make such a decision to sell.

Expert:  bigduckontax replied 3 years ago.
As I said you will almost certainly need to create a trust to enable the youngsters to hold the property. Independent legal advice is essential also.

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Expert:  bigduckontax replied 3 years ago.
Thank you for your support.