Capital Gains: Jointly buying a house with student DC

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One of many options when DS goes to Uni is that he buys a house to stay in for last 2 yrs of his degree course. For deposit He would put in £20k, me & his dad would each put in £20k... we would be guarantors but DS might be able to cover pay the mortgage on income + lodger paying rent, and maybe we'd jointly cover any repair costs. If we don't outright gift the money to DS, what things would we need to do about capital gains when the property was sold? Would we need to declare the lodger rent as income in personal tax assessment, for instance?

I know it's complicated, just trying to start to understand the options. Cheers for any knowledge in replies !

How are you planning to own the house? If it’s in DS’s name only he should be entitled to the benefits of being a first time buyer and no CGT as it’s his only home.

I appreciate you are putting in £40k (plus paying the mortgage) but there maybe other ways of protecting this so you get it back. IANAL but a deed of trust where you are have a beneficial interest rather than owning the property. I think an hour with a solicitor might be worth the investment.

DS would probably need to do a self assessment. It’s worth looking at the rent a room scheme https://www.gov.uk/rent-room-in-your-home/the-rent-a-room-scheme

Again an hour with a solicitor would make sure you get it right before you buy,

rental income has to be declaredbut with lodgers, there is an amount you can make that's tax-free i think? so your DS needs to look into that.

it sounds like you need to have your name on it because of the mortgage? Or you maybe allowed to put it completely in his name. Your mortgage advisor should know the answer to this. At least they would've done 20 years ago, I'm not sure what anybody knows now!

If you do that, then he would have to fill in a tax return possibly, but he'll pay less tax than you on that rental income (depends on your income but seems a safe assumption that his is lower than yours ) so it's probably worth doing.

Then, when it comes to capital gains, according to the current situation, he wouldn't have to pay it because I presume it's going to be his only property. At the moment there's no CGT to pay on the sale of the property you lived in. If the labour chancellor decides to change that, then a lot of us will be really pissed off!

for the moment there is no CGT to pay on the sale of your own home.

Also, if your name is on theproperty, you'll be paying extra stamp duty because it will be an additional property for you - that would probably be your biggest cost at the beginning.

I think you need to do everything you can to get it in his name only, but I'm not a lawyer or an accountant or anything so I don't know how you do that. Mortgage advisor used to be really good on this kind of stuff.

Are all three joint owners? Stamp duty is excruciatingly painful especially if you already own property. I have a bad feeling that, if even one owner has a place already, all pay the increased rate. You would definitely have to check that that isn’t the case.

CGT will be payable by anyone who does not live there. Those who own and live there (ie your son) have the principal private residence exemption.

Really think about whether this is worth it for two years. The fixed costs of buying and selling are high. He should be sole owner to benefit from first time buyer status but would lose that advantage when buying for the longer term. If the property drops in value there would be no CGT and you would lose money.

Look into family help mortgages as a way of helping if you do go ahead.

You can earn £7500/yr from a lodger without paying tax

You and dh would pay cgtax
your dc wouldn’t as he lives in the property ( PRR)

If you declare the property for cgtax each year you benefit from not paying cgtax on £3k of the gain each year

If you don’t declare each year and only when you sell you cannot accrue the yearly £3k benefit. You will only get one £3k allowance

You and dh combined will pay cgtax on 66% of the financial gain on the property ( assuming you own it with dc )

So
if each year it increases in value by £10k you and dh pay cgtax on £6,600 but you get £3k off that
so you and dh will be taxed on £3,600

Thats £1,800 each to be taxed
for higher earners it’s taxed at 24%
for lower earners it’s at 18% or

If you wait till you sell and it’s increased £10k / year and you sell after 2 years you and dh pay cgtax on £13,200 with £3k off that
so you and dh will be taxed on £10,200

That’s £5,100 each to be taxed

As an aside
Comparing those two taxable sums
£10,200 taxable sum declaring once
and
£3,600 each year for two years ie £7,200 taxable sums declaring each year
There are clear benefits to not leaving it till you sell

Ps
obviously OP
the cost of buying and selling including any stamp etc is deducted from any increase in property price and not taxed

@DrPrunesqualer How do you apply the gain annually rather than at sale for CGT? Is it just residential property or any asset e.g. shares?

I’m just referring to property here

You can keep your yearly tax relief on shares but it depends on many factors including what type, how they’re held etc. It’s far more complex and advisable to seek professional advice

There are other practical considerations here. Does your DC actually want the responsibility of being an owner / occupier? How will they deal with housemates who don’t pay their “rent” or share of bills? What happens during the long holidays? What happens if they don’t want to live in the same place after graduation? Do you have have spare cash to cover repairs, maintenance, decoration?

There’s a benefit in all being tenants - someone else responsible for repairs and rent collection, using apps to share bills, parent guarantors etc which is the usual way students live. Add in the fixed costs related to buying/selling, the potential tax liability etc and I really wonder if it’s worth it.