Q My daughter is struggling to have a mortgage approved on a new flat costing £200,000. At the same time, my wife and I are lucky to have equity available in our family home. I am earning a good salary and my bank has indicated that it would approve a remortgage of £200,000 at a discounted rate.
The solution seems simple: my wife and I could remortgage the family home, buy the flat that my daughter is interested in, grant her an informal mortgage and allow her to live in the flat rent-free. She can pay off the mortgage directly to the bank – when the balance is zero we would transfer the ownership of the house to her.
My only concern is tax. Would the interest and capital repayments she makes directly to the bank be considered taxable rental income for us? If so, they would push me into the higher rate tax bracket and maybe make the plan unviable. SP
A You are right to be concerned about tax, but not just income tax. If you bought the flat in your and your wife’s names, you would have to pay the stamp duty bill of 2% of the cost of the property above the tax-exempt amount of £125,000 – so the bill would be 2% of £75,000 which is £1,500. But if you didn’t manage to complete the purchase of the flat by 1 April 2016, the stamp duty bill would go up to £7,500. This is because after that date stamp duty would be 3% on the first £125,000 and 5% on the remaining £75,000.
As the mortgage would not be in your daughter’s name, any money she paid to you for living in the flat would be treated as your income. However, you would be able to split the income from your daughter with your wife, so tax would be due on only half of it.
In addition, there could be a capital gains tax (CGT) bill when you eventually transfer ownership of the flat to your daughter, although again, because you would own the property jointly, your wife and you could split any taxable gain between you. There would be a lower CGT bill if, instead of remortgaging the family home, you and your wife took out a joint mortgage with your daughter and bought the flat together. That’s because when you came to give your daughter sole ownership of the property, you would be transferring only your share rather than the whole property.
You could avoid CGT altogether if you remortgaged your home to raise £200,000 to lend to your daughter so that she could buy the flat in her name only. But for this to work well, you would need to take security over the flat to secure your loan, which could mean high bill for legal fees. The advantage of this from the point of view of income tax would be that if you charged her what your lender charged you, only the interest part of the loan repayment would count as your income. The remainder would be repayment of capital, which doesn’t count as income.
Another alternative might be for you and your wife to lend your daughter a sufficient amount of money to put down as a deposit on the flat, which would enable her to get a mortgage in her own right and at a discounted rate of interest.
