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TonyTax
TonyTax, Tax Consultant
Category: Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I am taking out a mortgage to buy a house for my daughter,

Customer Question

I am taking out a mortgage to buy a house for my daughter, effectively loaning the money to her because she is unable to obtain a mortgage in her own right because she doesn't earn enough. She will pay me an amount each month equivalent to the repayment of the capital (but not the interest, which I will pay). After 20 years I will give the house to her.
Because I am retired, I will have to complete the mortgage payments in 8 years.
Would the money she pays me each month to cover the capital repayment be liable to tax?
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.

Hi.

So long as you have an agreement between you and your daughter drawn up, preferably by a solicitor, setting out the details of the loan including the repayment term then you won't have to pay tax on the capital payments to you by your daughter. In effect, she will be buying the property from you via an interest free loan and that fact should be reflected in the loan agreement.

If you loaned your daugher the money to buy the property and she paid you interest, that interest would be taxable income in your hands so any agreement with your daughter must make the nature of the payments she makes to you clear.

Unless your daughter is treated as owning the property from day one, then when you give it to her, HMRC will probably argue that you have disposed an asset at its market value and seek to charge Capital Gains Tax even though it could be argued that she had bought it from you over a 20 year period. I suspect the lender won't agree to your daughter's name appearing on the deeds. Since I'm not a property lawyer, it may be worth your while to consult one to see if there is a way that you can avoid being treated as the owner of the property.

The interest payments could be seen as gifts by you to your daughter with potential Inheritance Tax implications unless you can argue that they are gifts out of income which do not impact on your lifestyle. Take a look here for more information on gifts out of income.

I hope this helps but let me know if you have any further questions.

Customer: replied 2 years ago.

Many thanks for your really helpful reply.

How would I inform HMRC about the arrangement - just write to my tax office with a copy of the loan agreement?

Richard

Expert:  TonyTax replied 2 years ago.
You don't need to tell HMRC that a loan agreement exists unless they ask to see it.

You say you will pay off the mortgage in 8 years but that it will take your daughter 20 years to repay you. As property prices rise, you may find yourself with a CGT liability when you hand over the deeds to your daughter.

The earlier your daughter can be the "owner" of the property the better. Once the mortgage lender is paid off, you can simply secure your loan to your daughter on the property if you feel the need to do so and put it in her name but HMRC may still try to claim that you owned it for 8 years and charge you to CGT on any gain up to that point. There may also be Inheritance Tax implications. This is why I suggested that a property lawyer be consulted to see if there is a way of getting your daughter's name on the deeds from the start.
Customer: replied 2 years ago.

Thank you.

Expert:  TonyTax replied 2 years ago.
Thanks.
Customer: replied 2 years ago.

Just one more query. Does the loan agreement work when the property is still owned by me until the loan has been paid off?

Wouldn't HMRC say that nothing has actually been loaned to my daughter as she is not in possession of anything to repay.

Wouldn't I have to give her the property at the start (which I cannot do under the terms of my mortgage) for that to work?

Are there any examples or HMRC guidance which shows that the capital repayments would not be subject to tax even if I retain ownership?

Expert:  TonyTax replied 2 years ago.
This is what I have been getting at all along. There is a paradox in that your daughter will pay you over 20 years to effectively buy the house from you but you own it because the lender insists on it.

Because the lender has made that condition, I would argue that it is purely a form of protection for the lender and that the reality is that your daughter is repaying you for a loan from you to her which should be documented and that she should be treated as the house owner. HMRC may disagree but if there is a loan agreement, then the payments to you will not be income (in any event see below).

Even if your daughter gave you a sum of money each month with nothing in return you would not be taxed on it as income. I know several sons and daughters who supplement their parents incomes and there are no income tax consequences for the parents.

I've said all along in this dialogue that you need to have your daughter as the owner as soon as possible and that you should investigate other options. For example, some parents borrow against their own house to buy a property for their child and have the loan to their child legally secured on the property they buy.

I'm not aware of any HMRC examples of capital repayments not being subject to income tax and, in your case, it simply won't be the case for the reasons I gave two paragraphs ago.
Expert:  TonyTax replied 2 years ago.
Hi again.
It's been a few days since I answered your question. Is there anything you need further clarification on?
Customer: replied 2 years ago.

Many thanks for getting back to me.

I am now planning to draw up a purchase agreement under which my daughter and her husband agree to pay x payments of £y a month and one final payment of £z (in total equivalent to the full cost of the house purchase) after which the house becomes theirs. If at any time before the end they decide to move, the house would be sold and either the amount they have already paid would be returned to them and the agreement cancelled or the full amount would be transferred into the purchase of a new house and the agreement and payments would continue.



We are both happy with this. Do you think it clears up any lingering doubt that HMRC would regard the payments as rent?
Expert:  TonyTax replied 2 years ago.
The purchase agreement is a good idea and should avoid you being taxed on what the tax office might otherwise consider as rent.

My one concern is on the Capital Gains Tax position. As the price has been set at the start but is being paid over a number of years, there is a disposal by you of the property as soon as the purchase agreement is signed. Take a look under the heading Capital Gains Tax here on ascetainable but contingent consideration. There should be no gain as you will be disposing of the property so soon after buying it.

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