Tax On Student Let with Daughter

[anselld]

Hi

I have just finished reading "CARL BAYLEY How to Avoid Property Tax" and my head hurts!

My situation is that I have bought a Student buy to let which my daughter will use for the next two years.
During the 10 months term-time she will share with three other student tenants.
During the summer 2 months she will live there.
The property legal ownerhip is currently myself and my wife.

I was originally going to charge daughter rent same as the others but it seems to miss several tax saving opportunities to do that. So does any or all of the following work ....

(1) Treat 1/4 of the property as her own main residence. ie she does not pay rent, and we pay tax on the net proceeds from the other three tenants.
(2) Because of (1) 1/4 of the property is exempt from CGT
(3) Allow her to have the first £4250 of rental income ( ie Rent-a-room)
(4) Treat the whole property as her residence for 2 months of each year.

It does seem crazy for her to pay me rent only for me to be taxed on it. Especially when I will end up supporting her anyway for a couple of years. But I am not sure if the above will stand up to scrutiny.

Do I need to do anything to establish that she has a genuine "equitable interest"?

[TaxationPete]

As she is not the owner of the property she can not qualify for it to be your private residence so no CG relief. Nor can she claim rent a room as she is not the owner. You can not claim Rent a Room as you are not resident there. You could put the property in her name and the rental income would be taxed against her. As it is you and your wife then you will share the rental income 50/50 if joint owners. Regards Peter

[Telometer]

"put the property in her name" i.e. "give it to her". Once it is hers (to do with as she likes), she can then claim the reliefs you mention. However:

1) she may not be able to get a mortgage on it (if you have one)
2) you may not want to give it to her
3) it is unlikely that rent a room will apply, as with 3 tenants I guess you are better offsetting expenditure rather than offsetting no expenditure and claiming the £4,250 tax free.

You are correct that it is bonkers to charge her rent and then be taxed on it! Just don't charge her rent; but be aware that then 25% of all your expenditure on the property is not tax deductible.

[anselld]

No mortgage on the property so that isnt a problem.

What if I give her a 1/4 share as another tenant in common? Would that 1/4 then be CGT exempt? Then run the other 3/4 as normal let.

[TaxationPete]

Yes it would be but it does not sound tax efficient. If she was the owner then the rental income from the tenants would be taxed against her and the property would become her PPR and attract CG exemption. Howweever the gift of the property to her will form a PET at Open Market Value and that potetialy IHT remain in your and your wifes estate for 7 full years. If a condition of the gift was that you received the rental income then the PET would be a GWROB and remain in your estates full stop. Regards Peter

[anselld]

I can't afford to gift the whole thing; I have three daughters, they would all what one then :-)

Sounds like I will just have to keep it simple and give her rent free and claim 75% of expense against the remaining income, take the hit on CGT if necessary.

[TaxationPete]

You should speak with a legal professional regarding 'Beneficial Ownership' and 'Legal ownership', they can be different people. Regards Peter

[Telometer]

Best give them one third of the house each, and make sure they all go to the same University...

[AckerPilk]

What if the daughter was the sole registered owner of the property and had a secured family loan for the value of the property from the parents. Could the loan repayments be used to offset against the rental income, whilst the parents retain a "hold" on the property via the loan.
Any CGT would hopefully be avoided by the daughter's PPR status.
One issue is whether income from the family loan is non-taxable ?