Many taxpayers born in the 50’s and 60’s are playing a financial generation game as the strains of looking after their families stretch their means.

Their parents are living longer and often need financial assistance because they are asset rich and cash poor with a paid-for house from which they cannot easily release the equity

Then, their children are cash rich with jobs that pay well but asset poor because they cannot build up enough savings to put down as a deposit for their first home.

As the credit squeeze begins to bite, families are looking for solutions that minimise tax due on transferring or disposing of property.

The TaxationWeb forum is reflecting these issues with many questions about transferring residential property within the family.

Beneficial owners

One of the key issues for a taxpayer is who is the ‘beneficial owner’ of the property at the beginning and end of any transfers.

One rule of thumb is that tax follows ownership of an asset - this means the person chargeable to tax is the beneficial owner and that is not necessarily the person whose name is on the deed of conveyance or listed at the Land Registry.

A ‘beneficial owner’ is the legal term for the person who has the rights to any income generated by the property and the proceeds from any disposal.

“Disposal’ is a capital gains tax term that is not defined in law, but is taken to mean mainly a sale, exchange or gift of property.

If someone buys a house for another family member and lets the property to them at a commercial rent, then the beneficial owner pays income tax on any rental profits as part of a UK or overseas property business

Uncommercial letting

If the property is an uncommercial let - then the transaction is tax neutral, producing neither a rental profit or loss and does not require inclusion in rental accounts or a tax return until disposal. An uncommercial letting is when a home is let rent-free or at a less than market value rent. On disposal, any gain in the value of the asset may be subject to capital gains tax.

Helping to buy

If the taxpayer merely facilitates the financing of a property by acting as a mortgage guarantor or helping out with the deposit, it is unlikely they are a beneficial owner and should be clear of any tax responsibilities from the property.

If a taxpayer helps with financing a property for family, it would be as well to have the conveyancing solicitor cover the transaction with a declaration that stays with the deeds. If a tax inspector decides to look in to a disposal, contemporaneous documentary evidence prepared by an independent third party is available to prove intent and protect all parties from the risk of paying unnecessary tax.

House sitting

HMRC guidance for tax inspectors says a relative or friend may ‘house sit’ between normal lettings on commercial terms, provided the property is genuinely available for commercial letting - and the landlord is actively seeking tenants.

“It isn’t possible to lay down hard and fast rules but ordinary house sitting by a relative for a month in a period of three years or more will not normally lead to a loss of relief. On the other hand, relief will be lost if the relative is really just taking a month’s holiday in a country cottage,” says the guidance.
If house sitters occupy the property for more than a month, the tax man will try to impart the property is no longer a letting property and attempt to exclude any business expenses incurred in relation to the property.

Gifting property

A gift is a no strings attached transaction - once you gift a house to someone else, it must be unconditional and you must lose all control over the property.

Giving away the house you live in name only and staying there rent-free is a ‘gift with reservation’. The house will still count as part of your estate for inheritance tax unless you pay a commercial rent for living there. This type of gift can also lead to capital gains tax issues for the person receiving the property.

Property abroad

Gifting overseas property can be a minefield. Inheritance tax rules vary between countries and a will written in the UK may not be acceptable in a foreign jurisdiction. You should take professional advice in the country where your overseas property is located.

Pre-owned assets

If you owned a property that is not already tied up in the ‘gift without reservation’ rules, you may have to pay income tax if you gave someone cash or loan to buy a home you now live in. Paying a full market rent for the property or selling to an equity release scheme means the tax rules do not apply.

Paying rent

Just telling the tax man you pay a full market rent is not enough - you must prove you pay the cash.

Ensure the money leaves your bank account and goes to the owner’s bank account - and it must be one that you do not hold jointly or the tax man will assume you still have control of the money and chase any tax as if the rent was not paid.