The tax implications of buying a property for a son or daughter are unlikely to be the primary considerations but there are tax aspects which should be considered. Should the property occupied by the child be owned by the child or the parent?
Capital gains tax. Potentially the most significant aspect is the capital gains tax that might be due when the property is subsequently sold. If the property is owned by the parent and a gain is made, then there is an exposure to capital gains tax at 18% or 28%. However if the property is owned and lived in by the child, the child should be able to claim principal private residence relief when the property is sold and it is unlikely that any capital gains tax will be due.
Income tax. A student might also generate tax free income by letting out rooms in the residence. If the students total annual income from all sources is less than the personal allowance (£10,000 per annum) then no tax is payable. Further, even if other annual taxable income exceeds the annual allowance, if rents are less than £4,250, it may be possible to take advantage of the “rent-a-room” scheme such that any profit on letting is ignored for tax purposes.
Inheritance Tax. If the property is purchased without a loan, the gift of the property, or the cash to buy the property, will be a potentially exempt transfer. If a loan is taken out the repayments by the parents will be free of inheritance tax as the payments will qualify as normal gifts out of income. (Alternatively cash could be loaned to the child and secured on the property. This would not normally be a transfer for inheritance tax purposes.)
Other points. Parents may have reservations about giving property to children. In this case some form of Trust might be considered so that there is some extra control. Careful planning will be required and Liz Hooley (Liz@tax.uk.com) our resident in house lawyer will be pleased to advise.
The question in the title might also be directed to granddad or other individual with similar tax effects.
