Buy-to-let: does giving £600 rent to my sons help avoid landlord tax?
10-04-2015
Buy-to-let: does giving £600 rent to my sons help avoid landlord tax?
Ask an expert: These parents want to slash their tax bill by handing rental income to their two children, who part-own the family's buy-to-let property
HMRC wouldn't look kindly on parents who give buy-to-let income to student children as means of avoiding income tax Photo: Alamy
By Kate Palmer
My family jointly owns a £200,000 buy-to-let property - my husband and I own a third, with the remainder belonging to our two sons.
After agents' fees and expenses, the rent brings in £600 a month.
While my husband and I are both higher-rate taxpayers, our sons are both full-time students and pay no income tax.
I would like to split the income so that my sons take £300 per month each, but then pay us £100 each for us to pay for their expenses - at the moment we pay for their cars, holidays, food and bills.
Because we won't receive any rental income, but give it to our sons, does this enable us to effectively avoid paying tax on our third of the rental income?
CM, via email
There's no quick trick to escape paying income tax on your buy-to-let income. Whoever owns each third of the property will pay tax on that portion of the rent.
The taxman won't let you hand over rental returns to your sons in order to escape paying higher-rate tax.
There are two options to get around the higher-rate tax charge, but they are not easy fixes and risk falling foul of anti-avoidance laws, warns Tina Riches of accountancy firm Smith & Williamson.
"The parents should continue to be taxed on the rental income, even if they have given it away," she said. "This is because rental income will still be treated as belonging to the 'transferor'."
Each parent is a higher-rate taxpayer, so will need to declare the £100 monthly rent they each receive on their self-assessment tax returns.
One option to get around this is if the parents gifted their third of the property to their sons. However, if the £200,000 property has increased in value since they bought it, they could be liable to pay capital gains tax.
This is also a permanent choice rather than a short-term fix. Once the student sons graduate and get jobs, they will also be liable to pay tax on their buy-to-let income, because they are likely to earn more than the tax-free personal allowance (increasing to £10,800 in April 2016).
Calculator: How much rent to charge on buy-to-let?
HMRC could view this parent's plan to hand over rent to their children as illegitimate tax avoidance
Alternatively, the parents could carve up the property into a "freehold" owned by the parents, giving a "lease" for the sons. As leaseholders, they would have income rights attached.
This should be placed within a trust to maintain control of the property and minimise any unexpected tax consequences.
"However, this all comes at a price, including needing formal legal documents, and may not be worthwhile for this single property," Mrs Riches said.
Also, asking your sons to contribute £100 towards their living costs poses problems.
• Axe the buy-to-let tax campaign: explained in full here
This is because any rent you transfer must be a genuine gift – avoid money going in a circle, such as your sons paying you back, which could be seen as a sign of reciprocity.
The tax on buy-to-let income is also changing, so it's essential to plan for this.
By 2020, new tax rules for buy-to-let properties should be fully in force and the sons here may be taxpaying graduates – possibly at higher rates.
"As a family, any tax saving here may be only temporary and outweighed by the upfront costs," Mrs Riches said. "Coupled with the imminent tax changes on the horizon it would be best to see a qualified tax adviser."
The new tax changes explained
NOW
Your buy-to-let earns £20,000 a year and the interest-only mortgage costs £13,000 a year. Tax is due on the difference or profit. So you pay tax on £7,000, meaning £2,800 for HMRC and £4,200 for you.
2020
Tax is now due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest. So you pay 40pc tax on £20,000 (ie £8,000), less the 20pc credit (20pc of £13,000 = £2,600), meaning £5,400 for HMRC and £1,600 for you. Your tax bill has therefore gone up by 93pc.
Now, say Bank Rate – and in turn your mortgage rate – rises by a small fraction, lifting your mortgage cost to £15,000, while your rent remains at £20,000.
You will have to pay £5,000 tax in this scenario, so you make no profit at all.
• Have a question for our experts? Email moneyexpert@telegraph.co.uk