Property and the taxman
Discussion
My parents are thinking of giving me a lump sum to buy a house in London and i will pay a mortgage on anything above what they give me. This will take place on the proviso that they will get the proceeds from renting out the other rooms. Is there any way this can be done without Gordon getting his grubby mitts on more than is absolutely necessary?
ETA: Im concerned primarily with issues surrounding giving the money back to my parents. I know about the 7 year rule and income tax on the rent etc.
ETA: Im concerned primarily with issues surrounding giving the money back to my parents. I know about the 7 year rule and income tax on the rent etc.
Edited by CLK-GTR on Saturday 2nd August 18:29
Not much.
The gift of the lump sum they give you should escape tax as long as neither of your parents die within seven years of making the gift.
You will be the owner of the property so any rental profits you receive will be taxable ON YOU and you will need to complete a Self Assessment tax return to return the rental income each year.
Whether any tax is payable on the rent will be down to whether the rental income is higher or lower than the costs of maintaining the property and managing it.
If you rent out only one room in the house, you should be able to claim "Rent-A-Room" relief which entitles you to receive up £4,250 in the tax year without having to worry about returning the rent to the tax man or paying any tax on the rent.
What you do with the rent after you receive it (and pay tax on it, if appropriate) is of no real concertn of the tax man.
The gift of the lump sum they give you should escape tax as long as neither of your parents die within seven years of making the gift.
You will be the owner of the property so any rental profits you receive will be taxable ON YOU and you will need to complete a Self Assessment tax return to return the rental income each year.
Whether any tax is payable on the rent will be down to whether the rental income is higher or lower than the costs of maintaining the property and managing it.
If you rent out only one room in the house, you should be able to claim "Rent-A-Room" relief which entitles you to receive up £4,250 in the tax year without having to worry about returning the rent to the tax man or paying any tax on the rent.
What you do with the rent after you receive it (and pay tax on it, if appropriate) is of no real concertn of the tax man.
Ive edited the original post. I know about the 7 year rule and that ill have to pay tax on the rent myself, but i dont know if Gordon has implemented something to stop me giving them the money back for essentially no reason. My parents have seen a few tax specialists surrounding similar ideas and the consensus has always seemed to be that if they transfer the actual assets to me and try to keep some sort of interest in the proceeds of those assets then he will be there with his palms open wide.
Edited by CLK-GTR on Saturday 2nd August 18:33
In fact, it's not really a "gift" at all is it? It's a "loan" from your parents to you - which you are going to pay back.
The tax man will not be interested in that at all - unless the parents waive the repayment of the loan and turn it into a "gift". If that occurs, then there is still no tax concern unless one or both of them dies within 7 years.
The tax man will not be interested in that at all - unless the parents waive the repayment of the loan and turn it into a "gift". If that occurs, then there is still no tax concern unless one or both of them dies within 7 years.
"if they transfer the actual assets to me and try to keep some sort of interest in the proceeds of those assets then he will be there with his palms open wide."
Exactly, you can't give something away but still own it. If you gift them back the property, then the 7 year rule applies, but on your life.
If you mean - you will give them the income from the property that is now in your name as little "gifts" that will be seen as cynical as it sounds. Whatever words you use or describe "gift" is irrelevant. If you give something away, you lose all monetary interest in it. If the owner of that property then starts giving you money in return, it's not actually been given away has it? The IR tends to apply fairly straightforward criteria to such things however you try to use smoke and mirrors to disguise it.
Exactly, you can't give something away but still own it. If you gift them back the property, then the 7 year rule applies, but on your life.
If you mean - you will give them the income from the property that is now in your name as little "gifts" that will be seen as cynical as it sounds. Whatever words you use or describe "gift" is irrelevant. If you give something away, you lose all monetary interest in it. If the owner of that property then starts giving you money in return, it's not actually been given away has it? The IR tends to apply fairly straightforward criteria to such things however you try to use smoke and mirrors to disguise it.
Shaolin said:
"if they transfer the actual assets to me and try to keep some sort of interest in the proceeds of those assets then he will be there with his palms open wide."
Exactly, you can't give something away but still own it. If you gift them back the property, then the 7 year rule applies, but on your life.
If you mean - you will give them the income from the property that is now in your name as little "gifts" that will be seen as cynical as it sounds. Whatever words you use or describe "gift" is irrelevant. If you give something away, you lose all monetary interest in it. If the owner of that property then starts giving you money in return, it's not actually been given away has it? The IR tends to apply fairly straightforward criteria to such things however you try to use smoke and mirrors to disguise it.
so basically it can be done if i keep it simple. say they give me £100k to buy the house and they live for 7 years then i pay nothing on that. and then if i earn 100 a week from rent i pay income tax on that as standard and am left with 60 to gift to them. providing i also live for 7 years they get the full 60 each week?Exactly, you can't give something away but still own it. If you gift them back the property, then the 7 year rule applies, but on your life.
If you mean - you will give them the income from the property that is now in your name as little "gifts" that will be seen as cynical as it sounds. Whatever words you use or describe "gift" is irrelevant. If you give something away, you lose all monetary interest in it. If the owner of that property then starts giving you money in return, it's not actually been given away has it? The IR tends to apply fairly straightforward criteria to such things however you try to use smoke and mirrors to disguise it.
Edited by CLK-GTR on Saturday 2nd August 22:15
In that scenario, the tax man will see that they have retained a beneficial interest in the money they "gave away" and probably not consider it given away at all.
This is a very old problem for people who don't need the capital they have as they get older and so want to transfer that to others without incurring any Inheritance Tax, while still keeping the income that the capital generates. It's a long time since I worked in this line as a financial adviser, so details will have changed, but the same basic principles will apply. There used to be some off-shore investments that did what you want, but those loopholes have been closed now I think.
The basic premise is that if your parents give you a capital sum and you start to give them money back it will be seen by the IR as their retaining a "beneficial interest" in the income generated by the capital sum. Once given, there has to be a clean-break from the money.
I would recommend you talk to the Capital Taxes Office (in Nottingham I think) and get advice from them. I've always found the IR very helpful if you approach the question from the point of "I want to do the right thing here and pay what is due, can I do x, y or z?". I suspect you will be scuppered in what you want to do here in this respect. They won't advise you what to do or make any suggestions, but will tell you what the results will be, I sugest you have a few scenarios to put to them.
For instance, scenario - parents give you £50K now and keep £50K to generate more income than is sustainable in the long run (i.e. same income as from £100K), you keep all of your income from the £50K they gave you. In the future you may help them out financially with income if they cannot generate enough themselves from their now depleted assets. I suspect there may be a time scale that the IR would expect to have lapsed before they ignore this (but ASK them). It also requires a lot of trust and possibly swallowing of pride, so maybe not a very acceptable idea.
This is a very old problem for people who don't need the capital they have as they get older and so want to transfer that to others without incurring any Inheritance Tax, while still keeping the income that the capital generates. It's a long time since I worked in this line as a financial adviser, so details will have changed, but the same basic principles will apply. There used to be some off-shore investments that did what you want, but those loopholes have been closed now I think.
The basic premise is that if your parents give you a capital sum and you start to give them money back it will be seen by the IR as their retaining a "beneficial interest" in the income generated by the capital sum. Once given, there has to be a clean-break from the money.
I would recommend you talk to the Capital Taxes Office (in Nottingham I think) and get advice from them. I've always found the IR very helpful if you approach the question from the point of "I want to do the right thing here and pay what is due, can I do x, y or z?". I suspect you will be scuppered in what you want to do here in this respect. They won't advise you what to do or make any suggestions, but will tell you what the results will be, I sugest you have a few scenarios to put to them.
For instance, scenario - parents give you £50K now and keep £50K to generate more income than is sustainable in the long run (i.e. same income as from £100K), you keep all of your income from the £50K they gave you. In the future you may help them out financially with income if they cannot generate enough themselves from their now depleted assets. I suspect there may be a time scale that the IR would expect to have lapsed before they ignore this (but ASK them). It also requires a lot of trust and possibly swallowing of pride, so maybe not a very acceptable idea.
Shaolin said:
In that scenario, the tax man will see that they have retained a beneficial interest in the money they "gave away" and probably not consider it given away at all.
This is a very old problem for people who don't need the capital they have as they get older and so want to transfer that to others without incurring any Inheritance Tax, while still keeping the income that the capital generates. It's a long time since I worked in this line as a financial adviser, so details will have changed, but the same basic principles will apply. There used to be some off-shore investments that did what you want, but those loopholes have been closed now I think.
The basic premise is that if your parents give you a capital sum and you start to give them money back it will be seen by the IR as their retaining a "beneficial interest" in the income generated by the capital sum. Once given, there has to be a clean-break from the money.
I would recommend you talk to the Capital Taxes Office (in Nottingham I think) and get advice from them. I've always found the IR very helpful if you approach the question from the point of "I want to do the right thing here and pay what is due, can I do x, y or z?". I suspect you will be scuppered in what you want to do here in this respect. They won't advise you what to do or make any suggestions, but will tell you what the results will be, I sugest you have a few scenarios to put to them.
For instance, scenario - parents give you £50K now and keep £50K to generate more income than is sustainable in the long run (i.e. same income as from £100K), you keep all of your income from the £50K they gave you. In the future you may help them out financially with income if they cannot generate enough themselves from their now depleted assets. I suspect there may be a time scale that the IR would expect to have lapsed before they ignore this (but ASK them). It also requires a lot of trust and possibly swallowing of pride, so maybe not a very acceptable idea.
How about...This is a very old problem for people who don't need the capital they have as they get older and so want to transfer that to others without incurring any Inheritance Tax, while still keeping the income that the capital generates. It's a long time since I worked in this line as a financial adviser, so details will have changed, but the same basic principles will apply. There used to be some off-shore investments that did what you want, but those loopholes have been closed now I think.
The basic premise is that if your parents give you a capital sum and you start to give them money back it will be seen by the IR as their retaining a "beneficial interest" in the income generated by the capital sum. Once given, there has to be a clean-break from the money.
I would recommend you talk to the Capital Taxes Office (in Nottingham I think) and get advice from them. I've always found the IR very helpful if you approach the question from the point of "I want to do the right thing here and pay what is due, can I do x, y or z?". I suspect you will be scuppered in what you want to do here in this respect. They won't advise you what to do or make any suggestions, but will tell you what the results will be, I sugest you have a few scenarios to put to them.
For instance, scenario - parents give you £50K now and keep £50K to generate more income than is sustainable in the long run (i.e. same income as from £100K), you keep all of your income from the £50K they gave you. In the future you may help them out financially with income if they cannot generate enough themselves from their now depleted assets. I suspect there may be a time scale that the IR would expect to have lapsed before they ignore this (but ASK them). It also requires a lot of trust and possibly swallowing of pride, so maybe not a very acceptable idea.
The rent money is kept separate and used to pay the remainder of the mortgage/fund holidays/whatever else, and i gift my parents a sum every month from a seperate source ie my wages from a different bank account? Would they stretch the beneficial interest to two theoretically unrelated sources?
Edited by CLK-GTR on Sunday 3rd August 00:07
Rach81 said:
Do they check your bank accounts and go through theirs too?
The Revenue have access to ALL bank accounts in the UK (and now many overseas as well - including those in tax havens such as the Channel Islands).On the whole, however, Income Tax is operated undet the Self Assessment system. This means that it is fundamentally the respoinsibility of the tax payer to know and understand the circumstances under which they are obliged by law to notify the Revenue of sources of income and the income tax liability generated by that income. It is also the tax payer's responsibility to calculate the liabilities arising and make the payments of tax by the statutory payment dates.
It is a criminal offence NOT to conform to these regulations when they apply to you.
HMRC now has a very long arm.
The introduction of Self Assessment in 1995 introduced a massive switch in responsilities for notifying and calculating tax liabilities. The real problem is that the UK tax system is extremely complex and it was grossly unfair to pass the whole responsibility for knowing which bits of this extremely complex system apply to the individual taxpayer onto the shoulders of the taxpayers themselves.
The introduction of Self Assessment in 1995 introduced a massive switch in responsilities for notifying and calculating tax liabilities. The real problem is that the UK tax system is extremely complex and it was grossly unfair to pass the whole responsibility for knowing which bits of this extremely complex system apply to the individual taxpayer onto the shoulders of the taxpayers themselves.
Rach81 said:
I could earn more as a self employed hygienist but I'm very disorganised and terrible with money, I'd be bound to cock it up and get a massive fine. Maybe next year when I'm working privately full time 
It's not that difficult - as long as you have a good accountant helping you."gift with reservation" - thanks Choppers, I said it was a while since I was directly involved in this!
CLK-GTR, the IR tends to take Occam's Razor to such arrangements:
Fact - parent's gave you capital sum
Fact - you are paying your parents an income
Conclusion - the capital sum was a "gift with reservation"
It doesn't matter how convoluted the arrangement is, if you didn't have the capital sum you wouldn't be able to give your parents anything. If they had kept the capital sum, they could generate their own income. Like I said - phone the capital taxes office to get the final answer,
Rach81 - when someone dies, the executors of the will usually have to obtain "Probate" before being able to distribute the assets. Probate is not necessary if the esatate is small - below the Inheritance Tax threshold. If the estate is over the threshold, then the capital taxes office will be informed and swing into action. That's how they will know or be able to find out.
As for s/e and accountancy. I employed an accountant when I started to earn significant amounts through s/e until I realised that the accountant's fees were going up at the same rate as my income despite nothing becoming more complicated, he was effectively charging me twice as much to add 2+2 as he was to add 1+1. As I was doing much of the work in preparing my figures for him to work on anyway, it seemed pointless to continue to employ him, so I started doing it myself online. If I ever have a query I phone the IR and they have always been more than helpful. If you are showing willing to get it right, they make it as easy as they can - I suppose if you're arsey about it and arrogant about having to pay tax, they would be less helpful which is why many people go via accountants, though I doubt for most that the accountant saves them any money at all - mine didn't.
CLK-GTR, the IR tends to take Occam's Razor to such arrangements:
Fact - parent's gave you capital sum
Fact - you are paying your parents an income
Conclusion - the capital sum was a "gift with reservation"
It doesn't matter how convoluted the arrangement is, if you didn't have the capital sum you wouldn't be able to give your parents anything. If they had kept the capital sum, they could generate their own income. Like I said - phone the capital taxes office to get the final answer,
Rach81 - when someone dies, the executors of the will usually have to obtain "Probate" before being able to distribute the assets. Probate is not necessary if the esatate is small - below the Inheritance Tax threshold. If the estate is over the threshold, then the capital taxes office will be informed and swing into action. That's how they will know or be able to find out.
As for s/e and accountancy. I employed an accountant when I started to earn significant amounts through s/e until I realised that the accountant's fees were going up at the same rate as my income despite nothing becoming more complicated, he was effectively charging me twice as much to add 2+2 as he was to add 1+1. As I was doing much of the work in preparing my figures for him to work on anyway, it seemed pointless to continue to employ him, so I started doing it myself online. If I ever have a query I phone the IR and they have always been more than helpful. If you are showing willing to get it right, they make it as easy as they can - I suppose if you're arsey about it and arrogant about having to pay tax, they would be less helpful which is why many people go via accountants, though I doubt for most that the accountant saves them any money at all - mine didn't.
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