My 30 yr old son is long-term unemployed with no great hope…

Hi there

Thanks for the question.

Thats an excellent idea to put your son into work, however there are a number of tax implications to consider.

The first step is easy ie you are loaning your son money and he will return the funds back therefore there are no tax implications unless he pays back interest, in which case you need to declare the interest income.

It would be a good idea to have a loan agreement in place to support this transactions for any future references from taxman or any other party.

The second part is when he develops the property and tend it into 3 flats, the taxman is likely to consider him as a property developer and income tax charged instead of capital gains on eventual sale.

As you may know income tax rates are quite much higher than capital gains tax which is at 18% or 28%.

A solution to this is to consider buying this in the name of a limited company so that any income is taxed at 20% instead of the personal income tax rates.

If the house is already bought as you seem to sale, you will need to sell it to the company - there is less likely to be any cgt as the price would not have changed but you may incur stamp duty again.

To reduce overall tax you and other family members may need to be shareholders or directors, charge fees which are tax deductible and reduce the profits. Also draw dividends which can reduce your effective tax.

Does this help?

Alternatively he can live in this property, become his main residence so that he may get main residence relief on property. However this needs to be done carefully as he is developing the property into three flat..he wont get main residence relief on the two properties but on one (assuming he is not treated as property developer). He will be charged capital gains on the two properties and perhaps get away with the third property if he is living in that property...

The first option is clearer. The second is not that clear. In any case, before you take a decision please engage a property tax expert and help you map out what you could do and explain the tax effects of the above.You can easily get someone to sit down with you for less than £100 to do a detailed report for you and you can then make an informed decision.

I see you are now offline. I will log off now and wait to hear from you.If you are happy, please rate the question before you go.

Regards

I understand, you dont have to be shareholders. It can be his company and you would have effectively lend the company £30k. If he runs a LTD company he may not get the benefit as he is self employed.

If you choose second option which means he lives in the property, there is no minimum period to live there....but it has to be reasonable.

This option does not however make things easy or straight forward as the risk of being considered a property trader is not eliminated. The period he lives there and other factors put together will affect whether the taxman consider him to be a property developer. If HMRC considers him to be property trader he will get the gain taxed at a maximum of 45% .

Thanks for reply. Sorry couldnt log in.

Its an area that is quite complex - whenever one develops land /property into many other structures as there are many factors considered before the taxman considers one to be a property developer.

The only problem is when he is treated as one -especially when he sells the split properties within a few years of purchase, in which case, the taxman is quite fair in saying he is into that kind of trade.

That is why putting the property in a Ltd company will help as tax is always charged at 20%. I understand you may not like this option but its more straight forward.

One advantage of this is that the interest on the loan is deducted for tax purposes as well unlike the first option.

Since this is loan you can get your loan back with no tax implications on either side.

However i cant comment on what the benefit office will say on the arrangement - unfortunately im not an expert in this area. However if i were you i would simply ring the income support office and find out what their thoughts are.

Also worthy looking into this is the current ownership of the property; in case you seem to say the property was bought by you.

It would have been much easier to give him the cash and the property is bought in this name. If you are going to gift the property to the son you may also need to be aware of the potential inheritance tax effects- ie if you both to die within 7 years then the property is considered as part of your estate.

And capital gains tax if you transfer it. Hopefully you will transfer this sooner rather than later. If you transfer this earlier then there is not much capital gain in the property.

Hope this does not overwhelm you but its worthy engaging a property tax expert even at this stage to try to rectify some steps and avoid any further tax implications.

You are welcome. Would you mind to rate the question before you go. IF you need further clarification in the future you can always come back to this question which is already saved on your question folder with all the details of the chat in there.

Thanks