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Significant tax benefits to be had in gifting property to children

PKF-FPM Tax Corner

QUESTION: MY son will be going to university in the next few years. I have savings which I have put aside to help pay for his course fees and an investment which is about to mature which could be used to help with his day-to-day university expenses. Rather than using this cash to pay for rented student lodgings, what would the tax implications be if I acquired a small property near the university which I could rent out for a few years and also let my children use during university term time, with a view to selling it again in the next five to 10 years?

ANSWER: If you buy a property for any of your children to use when they are at university any uplift in value in the property between the date of acquisition and disposal would be liable to capital gains tax at 18 per cent or 28 per cent when the property is sold. The precise rate of CGT will depend on the level of other taxable income you have in the year of the disposal. Unfortunately as the property would not be classified as your main residence you would not benefit from the tax exemption given when an individual sells their principal private residence. Also, if you were to receive any rent from the property, for example, if you decided to rent out some of the rooms to other students, this would be taxable on you at income rates of up to 45 per cent.

There may, however, be significant tax benefits in buying a property if you were willing to acquire the property in one of your children's names. You could gift the property to your son after the purchase or you could make a loan of cash to your son to allow him to buy the property directly. This arrangement has several tax benefits. Your son would benefit from the "rent a room scheme" which enables individuals to earn tax-free rents by letting out spare rooms in their own home. Your son could receive rental income of up to £4,250 from any lodgers he may have in the house. This income is completely tax free regardless of what your son's other income is. If your son has no other earnings he could also receive a further £10,000 rental income tax free as this would be covered by his annual tax free personal allowance. In practical terms therefore, your son could let rooms in the property to friends at a total charge of up to £192 a week (£10,000 per year) and be completely exempt from tax in respect of this income. This income would go a long way towards the mortgage repayments. Another major benefit of this arrangement is that as the property will be in your son's name and it will be his principal private residence, it will be completely free from tax when it is sold.

If you decide to proceed with this tax planning opportunity we would advise that you obtain appropriate legal and tax advice, particularly if you are expecting a repayment of your loan. There are obvious risks with this planning as your son would have legal rights over the property and could dispose of the property at any time, without your prior approval, if the appropriate legal charges were not in place. Also, we would recommend that inheritance tax advice is obtained if you decide to make a gift of cash or property to the next generation. Specialist advice should be sought to ensure that this tax planning opportunity suits your specific circumstances.

* Janette Burns (j.burns@ pkffpm. com) is associate director at PKF-FPM (www. pkffpm.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.