What is the best option to minimise Tax/CGT?

[ivory]

We (=me+spouse) bought a property jointly in our names last July. It's in London, so looks like going up in future. We plan to keep it for a reasonable while. it is not on a BTL; we bought it outright by mortgaging our home. Objective was/is to let it back to daughter at Uni plus her friends. The friends pay rent to us; our daughter pays into an account that she draws back on to pay her living expenses. This saves us shelling out to support her, and teaches her to manage 'her own' money. So, the only income we see and record is from the 4 friends, and we calculate that income tax will be minimal, after allowable expenses. So far so good (or is this really the best way to do it?).

Now to CGT: we are about to do what we did last year: move down to the property for a few weeks in the summer void to do it up/maintain. Our daughter will still be there. Our son is also taking a room for next year as he has a job there. 3 of the friends return from late September. I have recently seen articles in the press which make we wonder if we should elect, over the summer, to change our Principal Private Residence (PPR) from our home to the rental property, within the stipulated 2 year period from purchase, in order to keep open the option to change the PPR in future. The advice in the article seemed to endorse/suggest this, even if just for a few weeks over the summer. Is this avoidance or evasion? Note: Both my spouse and I have a London office where we sometimes work, and we often commute, so a London base would not be unreasonable. What impact, if any, would it have on CGT on our own home (owned for 15 years and the forseeable) to change the PPR?.

Alternatively, with our son moving in, (employed locally and seemingly set to stay for a while), would it be beneficial in tax terms to sell him or transfer to him a small share in the property, have him share future CGT liability and/or have the option for him to act as sitting Landlord? (We do not want to tie him into anything just for our benefit, in case his circumstances change). There is the future option of doing this for our daughter too, after graduation, as she is likely to stay in London.

If we are trying to be as tax efficienct as possible, what is the recommended option(s)? or should we consider all of these?
Ivory.

[Tax Accountant]

Hi there,

A number of issues.

(1) My preferred option would be to have bought the property in the name of the daughter. Now this would extend to buying it in the name of the daughter and/or son.

They would benefit from Rent a Room relief for income tax purposes and also from the PPR relief/letting relief against CGT if and when they sell.

May be it is still not too late to do this, if necessary by gift or sale at full or below market value. Although this will be taxed on you on the basis of full market value, hopefully the increase in value is still managable in terms of CGT exposure. If necessary, you could leave part of the sale consideration owing as a private mortgage or you could act as guarantors.

Another alternative would be to add them as joint owners so that all of you would own it 25% each or in any other shares you prefer. If owned as joint owners, you should do this as ''tenants in common'' for flexibility.

As regards your main point, I would refer to the following link on the H M Revenue & Custom's Capital Gains Tax Manuals:

http://www.hmrc.gov.uk/manuals/cg4manual/cg64512.htm

You seem to indicate that the tax articles to which you refer confirms that you are able to nominate the London property as your ''Main Residence'' for CGT purposes. It would appear from the above link that there is no reason why your nomination is not acceptable. If so, you should nominate for a short period of say 1 week and revert again to your actual main residence. I consider that the very short period's loss of PPR relief against your main residence will be negligible and nothing to worry about.

One other possibility is for you to follow the Inland Revenue's example and back date your effective nomination to when you purchased the property (or thereabouts) and again back date your reversal nomination to say 1 week after the commencement date of the original nomination.

I would also refer you to another link which states that the Inland Revenue is most unlikely to comment on whether your nomination has been accepted or not. It will only be determined when you sell the property and submit your CGT computation with your SA Return.

http://www.hmrc.gov.uk/manuals/cg4manual/CG64530.htm

Finally, I refer to the following link which states that ''a property must be in use as a residence of that individual before a nomination can be valid. A nomination cannot be used to convert a dwelling house which is not being used as a residence into a residence for the purpose of obtaining relief.''

http://www.hmrc.gov.uk/manuals/cg4manual/cg64486.htm

It is therefore most important for you to ensure that the property must be used as your residence (ie a home) for your nomination to be effective. You must do everything that is possible to menifest that the property was used as your residence and keep evidence of this in case you are challenged.

However, it is simply necessary to establish residence and not necessary to use it as your main residence.

My only reservation is that you have the students coming back in September and whether this has any adverse effect on your claim that the property is your residence. However, I am of the opinion that the relevant period of residence is when it is vacant in the summer and so long as it is used as your residence during the period of nomination, the student situation may not be relevant. But this cannot be taken for granted.

I hope this helps.

Ramnik

[ivory]

Hi there,

(1) My preferred option would be to have bought the property in the name of the daughter. Now this would extend to buying it in the name of the daughter and/or son.

...They would benefit from Rent a Room relief for income tax purposes and also from the PPR relief/letting relief against CGT if and when they sell.

...If necessary, you could leave part of the sale consideration owing as a private mortgage

Another alternative would be to add them as joint owners so that all of you would own it 25% each or in any other shares you prefer. If owned as joint owners, you should do this as ''tenants in common'' for flexibility.

Ramnik

Thanks for your reply.

We had considered the point on son/daughter as named owner, but we were a bit worried about a future partner of an offspring maybe having a claim on the property, eg after a break up. And we may need to realise the asset ourselves (eg to fund retirement).

The private mortgage is an interesting concept, can you provide a web link?

We will definitely pursue establishing PPR for a short period, as we cannot see a risk or downside to this helpful suggestion.

The joint ownership as 'tenants in common' is also a useful distinction and I have followed it up to understand it better. What is the position here on % of ownership? Would it be possible to stipulate, say, a 10% ownership (eg as a gift) to each offspring living there? And would that automatically invoke a PPR relief for that offspring on 10% of Capital Gains in the relevant period of PPR (for them)? Or can the % be varied for CGT purposes by allocating a 25% share of the property to each, even though only 10% of the value has been paid or gifted?

Thank you for your insights.

Ivory

[Tax Accountant]

Thanks for your reply.

We had considered the point on son/daughter as named owner, but we were a bit worried about a future partner of an offspring maybe having a claim on the property, eg after a break up. And we may need to realise the asset ourselves (eg to fund retirement).

The private mortgage is an interesting concept, can you provide a web link?

You are best advised to see your solicitors for this. It is a legal question and not a tax one. As far as I am aware, your son/daughter could borrow from you rather than a bank. Also, as far as I am concerned, the private mortgage could be interest-free or a rate which doesn't have to be at market rate.

If you go down this route, at least your capital in the property upto it's present value is protected in case of later marital difficulties. In that event, you could effect a forced sale to get the ampunt of your private mortgage.


We will definitely pursue establishing PPR for a short period, as we cannot see a risk or downside to this helpful suggestion.

Yes, the worst scenario is that your nomination is not accepted. In theory you could be charged penalty and interest on CGT you were trying to save by claiming that nomination is valid. However, if you make the right disclosures in your tax return in the year of disposal, you should be protected.

The joint ownership as 'tenants in common' is also a useful distinction and I have followed it up to understand it better. What is the position here on % of ownership? Would it be possible to stipulate, say, a 10% ownership (eg as a gift) to each offspring living there? And would that automatically invoke a PPR relief for that offspring on 10% of Capital Gains in the relevant period of PPR (for them)?

Transfer of ownership can be in any percentages you wish. If you transfer 10% to each child, you and your wife are disposing a total of 20% between the two of you at market value, regardless of the amount which you actually charge to your children.

They in turn will have acquired 10% each and will benefit from PPR exemption for that percentage of any future gains.

You could also transfer further tranches of ownership in later years if you so wish.

Or can the % be varied for CGT purposes by allocating a 25% share of the property to each, even though only 10% of the value has been paid or gifted?

Beneficial ownership in the property in whatever percentage is applicable equally for Income as well as Capital. You cannot have one percentage for property ownership and different ownership for rental income.

If the spare rooms are let only by the children persuant to their share of the property ownership, you should investigate whether all the rents could belong to them only, and if so, covered by Rent a Room Relief of £4,250.

Thank you for your insights.

You should take legal advice regarding effecting the transfers by Deed of Trust, an internal contract between you and your children only. This means that the transfers are legally effective without changing Title Deeds or involving your mortgage lenders. This also means that any subsequent changes are easier to effect. It is important that the Trust Deed is effected by a solicitor

Ivory

See replies above in red.

Ramnik

[ivory]

Hallo Ramnik and other readers
Thanks for your help so far. To clarify your answer to me (below) and your comments on similar issues with other people:

"One other possibility is for you to follow the Inland Revenue's example and back date your effective nomination to when you purchased the property (or thereabouts) and again back date your reversal nomination to say 1 week after the commencement date of the original nomination....

It is therefore most important for you to ensure that the property must be used as your residence (ie a home) for your nomination to be effective. You must do everything that is possible to menifest that the property was used as your residence and keep evidence of this in case you are challenged".

We actually did live in the second property after we bought it last July. We were resident from 8th July when we bought it until early October when it was let - so four months - during which time we were doing it up. We have all the bills etc from that time.

So based on your comments to me and others, I think we have 2 choices. Can you confirm whether I have understood properly?

i) make a back dated nominal change of PPR for a week only. This would be for the purpose of establishing our right to switch the nomination in future, as from what you have said elsewhere I gather that a week is (understandably) not likely to be accepted as a genuine 'residence' for CGT purposes. I understand we would have to establish it as our residence for a more meaningful period, during which we would gather evidence of PPR status.

ii) make a back dated change of PPR to cover the 4 month period we were actually there last year, for the purpose of establishing actual residence for that period. The objective here would be to minimise our CGT Liability for our final 3 years of ownership.

Would these 4 months be a valid period? We would of course lose 4 months of PPR CGT relief for the same period on our other home, but that has been our PPR over a 16 year period, and we are unlikely to sell for several furher years, so the impact on the CGT liabiliy taken as a whole would not be enormous, based on the per week calculations I have seen elsewhere in the forums.

ii) looks like the better option to me. Have I got the hang of it now?

Thanks
Ivory

[Tax Accountant]

If an individual has two or more residences, he or she has the right to nominate which of these residences is to be treated as his or her main residence for any period.

I reiterate that a property must be used as your residence. I cannot comment whether your occupation of the property amounts to use of it as residence for the purpose of PPR relief.

If it does, you are able to make a nomination within the required time limit for PPR relief in favour of the secondary residence. Any such nomination comes to an end when you stop using it as your residence or when you vary the original nomination in favour of another residence.

Ramnik

[Grange]

The private mortgage is an interesting concept, can you provide a web link?

You are best advised to see your solicitors for this. It is a legal question and not a tax one. As far as I am aware, your son/daughter could borrow from you rather than a bank. Also, as far as I am concerned, the private mortgage could be interest-free or a rate which doesn't have to be at market rate.



I am posting a couple of contrary views for discussion.

I would suggest that a mortgage for less than market rate may constitute a disposal for IHT purposes (of, each year, the discount compared to market rate). It would of course be a PET, so irrelevant provided you live for over 7 years.

In order to achieve this private mortgage, you are borrowing from the bank, and then lending on to your child. The income from your child would presumably be a trading loan relationship - against which you could offset your mortgage interest. You would therefore presumably have to submit the trading pages of your tax return. Ramnik - any NI considerations? It would show a loss if you lend on at a lower rate of interest, but I doubt the loss would be any use to you. Ramnik - does transfer pricing apply to individuals - which would no doubt require OP to recognise some form of profit margin on the loan?

[Tax Accountant]

I am posting a couple of contrary views for discussion.

I would suggest that a mortgage for less than market rate may constitute a disposal for IHT purposes (of, each year, the discount compared to market rate). It would of course be a PET, so irrelevant provided you live for over 7 years.

In order to achieve this private mortgage, you are borrowing from the bank, and then lending on to your child. The income from your child would presumably be a trading loan relationship - against which you could offset your mortgage interest. You would therefore presumably have to submit the trading pages of your tax return. Ramnik - any NI considerations? It would show a loss if you lend on at a lower rate of interest, but I doubt the loss would be any use to you. Ramnik - does transfer pricing apply to individuals - which would no doubt require OP to recognise some form of profit margin on the loan?

Hi Grange,

(1) If the private mortgage is supported by a mortgage from an external lender, I would suggest that this is most likely to be exempted as 'normal expenditure out of income'.

(2) I don't think that this one-off transaction would amount to trading. It has none of the attributes of 'badges of trade'. Am I missing something here or are you letting your imagination run wild?

Ramnik

[jonblair123]

Hi there,



Another alternative would be to add them as joint owners so that all of you would own it 25% each or in any other shares you prefer. If owned as joint owners, you should do this as ''tenants in common'' for flexibility.


Ramnik

Hi Ramnik,
Please can you tell me what happens if children are added as joint owners in relation to CGT. I mean when you add them, is it deemed that you have disposed of part of an asset and therefore immediately liable to CGT?

Also, why as tenants in common? what flexibility?

[Tax Accountant]

Hi Ramnik,
Please can you tell me what happens if children are added as joint owners in relation to CGT. I mean when you add them, is it deemed that you have disposed of part of an asset and therefore immediately liable to CGT?

Also, why as tenants in common? what flexibility?

(1) I think I have already answered the first question in my earlier reply to this thread.

''May be it is still not too late to do this, if necessary by gift or sale at full or below market value. Although this will be taxed on you on the basis of full market value, hopefully the increase in value is still managable in terms of CGT exposure.''

(2) Tenants in common allows an individual to have exclusive ownership rights over their share of the property to do what he/she wishes to do, eg to sell or transfer to a third party.

A joint tenancy is not exclusive ownership over the share owned. They cannot sale or transfer their share to a third party. Upon death, the share automatically vests to the other joint owners.

Ramnik