I have heard about a new incentive for first-time buyers recently introduced. My daughter is at university and I would like to buy her a house for her and her boyfriend to live in. What’s the best way for me to do this?
The introduction of taxpayer-backed 95 per cent mortgages was announced recently as part of a package of measures to help the housing market.
There will be up to 16,000 new homes built by allowing an acceleration of investment in construction sites where work has stalled. There will also be an initiative to refurbish many of the 700,000 empty homes, mainly in deprived areas, to help with affordable homeownership.
It make sense to ensure your daughter can live in a safe area close to her university where her friends can also live, resulting in rental income which can be given to your daughter or paid directly to you.
The appeal of buying a property for your daughter is obvious. Many people see a purchase of a second property to rent out as an investment but there can be problems, such as damaged property. Some are unfortunate enough to buy property in areas where prices fall, undesirable neighbours move in or subsidence occurs. All these factors can make buying a second property a high-risk decision.
You need to consider the taxation implications and decide whether you buy the property in your name or your daughter’s name.
As you are buying a house for a relative to live in and you do not live in it yourself, you will not get private residence relief on capital gains tax when you come to sell or dispose of the property.
If you buy well, you can make a significant profit which will be liable to capital gains tax on any gain that you cannot offset against your annual allowance of £10,600.
Do be aware that legislation will be introduced in Finance Bill 2012 to provide that the capital gains tax annual exempt amount will rise in line with the consumer price index instead of the retail prices index. The CPI is normally lower than the RPI. For example, in October 2011, CPI annual inflation stood at 5 per cent while RPI was 5.4 per cent. This change means the CGT annual allowance will be worth less in future years.
You could buy the property in your daughter’s name using a capital appreciation loan which you can finance from existing investments or by releasing equity from your home. In this case, your daughter’s name appears on the deeds and she gets the main residence exemption as she lives in the property. You get a secured charge over the property alongside the mortgage company which will have priority of repayment.
If the property increases in value, you take a share of the gain without being liable for capital gains tax. As you are not going to charge interest on the loan, you do not need to pay any income tax.
You could set up a trust to hold the property but this can be complex and you will need legal advice before doing so. The advantage of a trust is when the property is sold, the trust will be exempt from CGT because the property has been occupied by your child as their main residence.
Before you decide which route to take, let us check that all your investments are performing as they should be, with the appropriate level of volatility and risk. Property as an investment can be risky but it can be rewarding.
Kim North (kim@techandtech. co.uk) is managing director of Technology and Technical