Q I am planning to remortgage my house and buy a small cottage for my son. My intention is to let him live there and for him to pay the equivalent of what he would pay on a mortgage, which he cannot currently get as a self-employed builder with only one good year out of his past three taxreturns and poor credit from a couple of credit cards.
The advantage to him, apart from needing no deposit or other fees, is that although I would need the money paying back, if he did hit some slow periods at work I would be more lenient in terms of missed mortgage payments than a commercial lender.
He would need to pay me back £45,000 at 5% interest (basically what I would be paying on the remortgage) for 20 years, and then the house would be his. I would lose out on my current good mortgage deal, but that would be my contribution I guess.
Would his paying back of the loan (at a rate of £297 a month) be classed as income, and would I have to pay tax on it? Once these 20-year payments are made can I just sign over the house to him with no risk ofcapital gains tax (CGT) or inheritance tax (IHT)? GY
A The interest part of the £297 monthly payment will be classed as income and so be liable to income tax, but any repayment of capital is not taxable. So of the total £71,280 your son will have paid you by the end of the 20-year term, £26,280 is taxable interest and the remaining £45,000 is repayment of capital. On your tax return you have to give the amount of interest received in a particular tax year.
As far as CGT goes, if you buy the cottage in your name and then sign it over to your son in 20 years' time you could face a bill in the future. If, however, you lent the money raised on your home to your son for him to buy the cottage in his name, CGT would not be an issue. If you were to lend your son the money in this way you should consider taking a charge over the property (in the way a mortgage lender would) to make sure you have security for the loan.
Making a genuine loan to your son which you expect to be repaid does not attract IHT. However, if you were to give your son the money to buy the cottage without a requirement to pay it back, there could be a tax bill if you died within seven years of making the gift.
