The tax advantages of sharing property with the family
IF you have family, there may be advantages in involving them in some form of shared ownership of property, but there are also risks.
We wouldn’t generally advise gifting any part of your own home, so this article is relevant to readers who have a second property, or who might be thinking of buying a second or subsequent property.
If you have children, then transferring a let property or part of a let property to your minor child so that they can benefit from letting income might sound like it could be a sensible idea.
However, that might not necessarily be the case. If you are thinking of using your young child’s personal tax allowances and lower rate tax bands to save money, unfortunately this isn’t effective for income tax purposes.
Aside from the first £100, any income will still be taxed on the parental donor at the parent’s own tax rate, though the child can still receive the actual income.
For tax purposes a “minor” is a child 18 years of age or younger. There is no such income tax restriction for a gift from a parent to adult offspring.
In contrast, there is no tax restriction on the income that any grandchild can enjoy from an asset donated to them by a grandparent.
But for any substantial gift between family members “asset protection” is also an important consideration.
Once the child turns 18, they are likely to have full title to the income and capital that you have gifted to them. Are they going to use the property and the income sensibly (in your view, not theirs that is), or are you in the good position of being able to trust their judgement?
You have to think of the worst case scenario. Will that share of property be part of their potential divorce settlement and exit the family entirely?
For reasons of protection alone, many families use a trust to hold the asset with the children or grandchildren as beneficiaries. A trust’s assets cannot form part of their divorce settlement, because a beneficiary does not legally own the asset. Neither can a child sell a trust asset – that is only for the trustees to decide, and they are bound by an implicit duty to do what is in the best interest of each and every beneficiary of that particular trust. As yet unborn grandchildren can be included in the trust too, by adding them as a general class of beneficiary.
Sharing property income with your spouse or partner, or other family member can be tax efficient if they are liable at a lower rate of tax and you are genuinely prepared to give them the share of income and property ownership. For income sharing, tax rules mean that a property that is owned jointly by husband and wife or civil partners is deemed to be owned 50:50 for income tax purposes even if the actual ratio of ownership is different. For example, where a residential property is owned in the proportion 25:75 by husband and wife is let, HMRC will still require them to report the income 50:50 on their tax returns, and there are penalties for getting it wrong. They can only report the income 25:75 if they have sent HMRC a formal election that they wish to be taxed on the basis of their actual ownership, and it will only apply to income after the date of the election. This stringent requirement is only applied to spouses or civil partners, and if that same property had been owned 25:75 by siblings they could report the income to HMRC in that proportion without notifying HMRC first. Except for spouses and civil partners, any joint property owners can agree to split the property income how they wish to regardless of the underlying proportion of ownership.
As long as the income is actually split in that proportion, then it will count for tax purposes too.
If you are planning on making a gift of property, there may be potential capital taxes issues to consider first.