I have been asked by a family member to let them know the potential tax consequences of the following scenario. I do not do a great deal of CGT work, so I would be grateful if anyone could point out any howlers with the assumptions that I have made?
Ok… Scenario - Father bought a house as an investment, for cash, a few years ago. Son moved in and pays a below market rent. Father wants to help son get a foot on the housing ladder and will allow the son to buy 20% of the house at market rate. Also, future monthly payments (formerly rent) will also go towards buying more of the house, the price used being the same as when the 20% was bought (i.e. other than the initial 20%, future purchases will not be at market value, they will be fixed). These monthly amounts will only be officially recorded (Land Registry/HMRC etc.) once they amount to 5% of the house price at the initial valuation.
Tax implications:
1. 20% payment - Father will be liable for CGT on 20% of the gain since he bought it (less costs, allowance etc.) Son will be liable for SDLT if it is above the limit.
2. 5% payments - Father will be liable for CGT on 5% of the gain (based on new market value) since he bought it (less costs, allowance etc.) Son will be liable for SDLT on the lower price (if any is due). The difference between the sale price and the market value is considered a gift and will only be of significance should the father die within 7 years and need to pay IHT.
Finally, would the payments on account thing stand up to scrutiny (as in HMRC used to see rent and now nothing for a while) or would it be better for the Father to officially record the 5% first (as in Land Registry, CGT, SDLT etc.) and the son make the instalments in arrears of the part sale being recognised?
Thanks for any help!
Replies (7)
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Who is going to calculate this (and how) over the next 25 years. It's going to get horrendously complicated, especially with the L.R.
Why not just sell him the house and grant a mortgage?
Why does he not just sell the whole 50% subject to a private mortgage? Same cash flow for father and son. Slashes legal fees by 90%.