It is easy to envisage a number of scenarios where one person may buy a house for another person to live in. While tax is unlikely to be the driving factor in a decision to provide accommodation for someone else, it is advisable to consider the tax consequences up front. Let’s take a look at a range of scenarios and the tax implications that surround them.
Student accommodation
Many parents opt to buy an investment property for their student son or daughter to live in while at university. This can be an attractive proposition and a worthwhile investment. Buying a property provides the opportunity to earn a return, rather than spending money on expensive rented accommodation.
Depending on the property, it will generally be possible to rent rooms to other students, thereby generating an income. While the son or daughter studies, the property should appreciate, providing a welcome return on investment. Many parents also like the peace of mind that comes with knowing their child is living in a family-owned property.
Understandably, many parents would be reluctant to give their 18-year-old son or daughter a house. However, principal private residence relief (PPR) will not cover any gain if the parents own the house but do not live there.
This relief exempts from tax any gain on a property that is a person’s only or main residence. Otherwise, any gain from property disposal is subject to capital gains tax (CGT).
Lending money
Alternatively, the parents could lend the child the money to buy the property. For example, if the student’s son or daughter owned the property and lived there as their primary or sole residence, any sale gains would be tax-free due to PPR coverage.
If the student’s son or daughter did not sell the property immediately after graduating from university but instead kept it for a while before selling, a portion of the gain may be taxable.
The yearly CGT allowance can offset any taxable component of the gain, and the letting relief for the final 36 months of ownership could shield the taxable portion from taxation. However, in order to purchase the property, the recipient would have to pay the interest on the family loan.
When a parent buys a home for their student child to live in, friends usually rent the extra rooms. Although the student can benefit from tax relief, all rental income is taxable. To qualify for this tax credit, the student must pay rent.
Any rental income paid to the parents is taxed according to the normal rules for taxing rental income. Similarly, the usual costs are deductible. However, if the son or daughter does not pay the rent, the taxman may question the let’s commerciality.
If the son or daughter pays the rent, they are liable for tax that the relief doesn’t cover. They can deduct their personal allowance from taxable rental profits if they haven’t used it.
Divorce
After divorce, one party may leave the marital home while the other stays. A person loses their entitlement to PPR when a property no longer serves as their primary residence.
For example, if a husband moves out of the marital home after a separation or divorce, he may continue to pay the mortgage and own a portion of the property until the children reach adulthood. At this point, they will sell the property and divide the proceeds.
However, in this situation, a measure of statutory relief is available. Under certain conditions, the ex-spouse can maintain their entitlement to PPR after a divorce. For tax purposes, an individual can only have one main residence at any given time.
If the ex-spouse subsequently buys a new residence before selling the marital home, he will need to elect which property is his main residence for tax purposes. This doesn’t have to be his primary residence; it can be the one with the best tax result.
Practical Tip:
You should seek professional advice before making the purchase to make sure the transaction is properly structured and all parties involved are aware of the implications. After purchasing the property, it might be too late to achieve a favourable tax outcome.
