First Time Home Buyer Guide
Tax implications of parents helping children buy a first home
There are plenty of ways a parent can help their child become a first time buyer, but if it involves money, chances are there are tax implications and tax advice should be sought.
Inheritance tax (IHT): IHT is payable on your death at a maximum rate of 40 per cent. It currently applies to estates (which incorporates property and cash) valued at £325,000 or more. IHT also applies to any gifts made in the seven-year period leading up to your death. For example, if you give more than £3,000 in cash to your child within one year, IHT will be payable on the excess sum if you die during the next seven years. Similarly, if you sign your own property over to your child, so they can benefit from its equity growth, IHT will also be payable if you die within seven years. Additionally, under the gift with reservation rule there are still potential inheritance tax and long term care planning implications and given the complexity of issues you should consult a specialist should you require advice on this subject.
Tapering, exemptions and relief of IHT : However, IHT is priced on a tiered scale according to when you die within the seven years. For example, although maximum IHT – at 40 per cent – is payable if you die within the first three years of making a gift, only 80 per cent of this charge will be made if you die within three to four years. This tapers down to just a 20 per cent IHT charge if you die within six to seven year.
Stamp Duty: This tax now kicks in on property (or ‘land') valued at £175,000 or more. Therefore, if you want to give your property to your child while you are still living there – and charge nothing for it – the tax will not be payable. If you sell your property to your child Stamp Duty still applies. But in this case, if it is priced at less than market value with a view to escaping the tax it could find you in breach of HM Revenue & Customs restrictions (formerly Inland Revenue) and still may result in the tax being charged.
Pre-owned Asset tax : This is a new tax that was introduced in the budget of 2005. Its purpose is to close the loophole of parents signing their property over to their children in advance – thus escaping IHT. In short, if you as a parent are living in a property that now belongs to your child and are not paying full market rent, you must pay this tax on the ‘benefit' you are receiving. If you buy a property for your child and don't charge them rent, this tax does not apply. This is because, if the property is in your name, IHT will apply instead if you die within seven years.
Capital gains Tax (CGT): This tax is payable at your marginal rate of tax. It applies literally to ‘capital gains' on investments such as second homes. So if you buy a property with your child and it is not your principle residence, CGT will be applied to the profit made when you dispose of your proportion of the house. ‘Disposing of your portion of the house' means either selling it or transferring it over to the sole name of your child. So, if you own 50 per cent of the property, which was worth £70,000 at the time of purchase and has risen to £100,000 when you dispose of your portion, CGT will be payable on the difference of £30,000, subject to any available taper relief. However, the first £8,500 of this counts as your personal allowance and is tax-free. To minimise your CGT liability you can claim ownership of just a small portion of the property or buy the portion in joint names with your partner and make use of two personal allowances.
Tax relief on renting out a room : If your child wants to boost their income by renting a room out in their new property, the first £4,250 of rent received is tax-free under the government's Rent-a-Room scheme. Rent received above this threshold is deemed as additional income and will be taxed at the same rate as your child's normal tax bracket.
More Information about Parental Help for First Time Buyers
Helping with a deposit l Helping with the mortgage l Making a gift l Legal Implications of parents helping children l Seeking out the right financial advice