In England and Northern Ireland, the zero rate threshold for first-time SDLT buyers is now £425,000 and the maximum property value covered by this relief is £625,000. If more than one person purchases the property, all parties must be first-time purchasers to be eligible for relief.
So buying a home across generations could forfeit the SDLT deduction and similar property tax deductions in Scotland. In addition, a surcharge of 3% stamp duty may apply to parents purchasing a UK home on top of one they already own.
Real estate stamp duty triggers a pre-tax claim, but the capital gains tax (CGT) position is often not considered until the property is sold. Current CGT rates for residential property are between 18% and 28% on taxable gains on disposal. Liability usually arises when the property being sold is not the primary residence of the seller.
Since the CGT annual deduction will be phased out from 6 April 2023, if the home is the child's primary residence and the parents are not, the valuation of the property will be based on the parent's when the property is sold. Hampered by tax burden.
If the family purchased the property for investment purposes, this impact could be even greater as all parties may be subject to her CGT upon disposal. Suppose a parent helps a child purchase property as an investment property while the child is home. In that case, confusion can arise as to who is responsible for income tax on the rental income generated. If parents and children legally own the home, rental income should be taxed per legal owner unless there is a formal trust deed.
This is often misunderstood as only the child (or the parent) declares rental income on the annual tax return. Not only is this inaccurate, it can lead to underpayment of taxes and potential inquiries from her HMRC.
If your child is a student, they may be less eligible for an education loan because rental income is taken into account when applying for an education loan.
Inheritance tax (IHT) should not be ignored either. Deposit fund contributions represent a potential tax-free transfer by parents when made as a direct gift. Subject to the 7-year rule, this may benefit the donor's estate by reducing the value of her IHT contribution upon the donor's death.
However, it sometimes happens that families enter into interest-free loan agreements even though they intend to transfer the funds at a later date. While this exposes the child to new financial obligations and helps develop financial management skills, loan arrangements may leave the parents' fortune to a greater extent, even if they live more than seven years from the date of the intended gift. It puts you at risk for IHT.
In some cases, trust structures are created unintentionally, directly or indirectly. Compliance with registration and annual trustee registration services should also be considered in this case. Finally, when buying real estate, the existence of a current will should not be ignored to avoid unnecessary family disputes later.
If you are a landlord looking to enhance your property portfolio and make informed decisions, reach out to our accountants, who have supported many landlords over the last decade and a half.
