QI RECENTLY inherited £50,000 and plan to use it to buy a three-bedroomed flat in Stirling for my son. He and two of his friends will live in it while at university, with his friends paying rent, which will pay the remainder of the mortgage. My earnings are £50,000 a year and I have a company car and pension. Is it more tax-efficient for the flat to be in my name or in my son’s?
CB PerthAFrom an income tax perspective, it is likely to be more tax-efficient for the flat to be in your son’s name.
If the flat were to be in your name, the rental income would need to be declared by you and, given your annu
al salary, this would be taxed at the higher rate of 40 per cent.
If the flat were to be in your son’s name, he would have the choice of opting into the Rent a Room Scheme. This is an optional exemption scheme that would let your son receive up to £4,250 in tax year 2008-9 without having to pay any tax.
This would be available if the flat bought will qualify as your son’s only or main home and the rooms that are let to his friends are furnished.
There are advantages and disadvantages of the scheme and if you decide that your son will own the flat, it will be necessary to work out whether it is best for your son to opt in or remain outside the scheme.
Importantly, if your son opts into the scheme, he will not be able to claim any expenses relating to the letting (for example, wear and tear, insurance, repairs, heating and lighting).
To work out whether your son will be better off joining the scheme or declaring all of the letting income and claiming expenses on his tax return, you need to compare the following:
&149 how much income he is left with after his expenses; and
• the amount of his receipts (rent plus any income from laundry services, meals, etc) over £4,250.
If he opts out of the scheme (or simply does nothing) he will pay income tax on the first amount to the extent that the rental exceeds his annual allowance (assuming he has no other income). If he has other income (from a part-time job for example) which exhausts his annual allowance, tax will be payable on the rental at his marginal rate of tax.
If he opts into the scheme he will pay tax on the second amount. His personal allowance will remain available to set off against other income.
There are also other issues that should be taken into account.
As you received the inheritance, ownership of the flat being in your son’s name will constitute a gift by you of £50,000.
If you were to die within seven years of making this gift, the £50,000 would be added onto the value of your assets at death and potentially subject to inheritance tax. To avoid this, you could loan the £50,000 to your son to allow him to buy the flat. Alternatively, if the person you are inheriting the money from died within the last two years you could enter into a Deed of Variation, stating that you wish the inheritance to be paid directly to your son from the estate of the person who died.
Also, if the flat is in your son’s name and is his main home, he would be able to claim principal private residence relief for capital gains tax purposes were he to sell the flat in the future. You would not be eligible for this.
It is important to remember that, if your son owns the flat, the mortgage will have to be in his name.
Will your son be able to obtain a mortgage, even with you acting as guarantor? Also, are you happy that your son will be able to sell the flat independently of you?
It is important to note that decisions should not generally be made based on tax reasons alone.
• Glen Gilson is head of private client & financial services at HBJ Gateley Wareing.
• If you have a question you need answered, write to Jeff Salway, Personal Finance Editor, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: .
These answers are for guidance only. No responsibility for loss occasioned by any person acting, or refraining from acting, as a result of these answers can be accepted by Grant Thornton or The Scotsman Publications Ltd
The full article contains 786 words and appears in The Scotsman newspaper.
