My wife and I, both pensioners, wish to sell our house (worth £300,000) and buy two two-bedroom flats (each £150,000). We wish to live in one flat and rent out the other to earn some money for the further education of our two grandchildren, who are eight and 12 years old.
Could you tell us what would be a tax-efficient way to do this? Should we buy these flats in our names or in our grandsons' names? What are the income tax and capital gains tax implications?
Read our guide to tax and giving money to children.
I am somewhat at a loss to understand why you want to do this. I am assuming that you think that property is a safe investment that gives good returns, and you think this would be a good way to create a nest egg for your grandchildren.
Since you seem unsure about the implications of going into buy-to-let, I am not sure why you have come to this conclusion. Perhaps you have friends who have made profits from property investment in the past.
Anyone thinking of going into buy-to-let needs to realise that property investing is a business and you need to work at it – just like being a dentist, a shopkeeper or a farmer.
You can get someone else, such as an agent, to do the donkey work for you, but this will, of course, reduce any profits you will make because they will charge you fees.
Five things that make a good buy-to-let property.
Do your research
Assuming you want to do the work yourself, the first thing you would need to do is choose a suitable property to let out. Do you know where there are flats that will easily get tenants in your area? If you end up with a flat and no tenants – even for a few months at a time – you will end up with all the expense of property ownership and no income.
Since the older child is already 12 you are only looking at a six year window to make a profit before he would need the funds, if further education is what you are saving for – and you haven’t even found a suitable property yet so it looks as if the investment period could be even shorter than six years.
How is the property market performing in your part of the country? If you buy a flat and then can only sell it for less than you paid for it, it won’t have been much of an investment, and you might as well have put your money under the mattress?
Are you sure you can cope with being a landlord? Will you maintain the flat you rent out yourself, collect the rent, comply with the legal aspects, such as tenancy deposit rules, gas boiler maintenance and insurance, and all the other chores such as taking the inventory of the contents and redecorating between tenancies?
If you don’t want to be bothered with all that you can hand some of these responsibilities to an agent, but this won’t come cheap. A full management option would typically cost you 15% of the annual rent plus VAT. So, if you charged your tenants £400 a month, you would need to pay the agent £864 a year, including VAT. You would also need to pay miscellaneous bills where they were not included in the agent’s fees, such as obtaining credit checks and references from tenants, doing the inventory and any other charges not included in the basic fee.
How to become a landlord.
The tax aspects of owning a property are actually pretty simple. You pay income tax on the profits from your letting after deducting allowable expenses. Do you currently submit an annual tax return? If not, are you happy to start doing one once you own the property, or will you need to employ an accountant?
If you keep the house in your name, you could be liable to capital gains tax when you come to sell it if it has increased in value between purchase and sale. Tax could potentially be due on the property because it is not your own residence, which is free of CGT. There are various allowances that you can offset against CGT including your own personal allowance and the cost of sale. An accountant or the solicitor who does the legal work for you relating to the sale should be able to advise.
You can’t put the flat in the children’s names to avoid the tax implications because minors under the age of 18 cannot own land or property. You could, however, put the property inside a trust, which could allow income from the rents to accumulate for the children’s benefit You would then need to decide if you want to be a trustee yourself - or would you want this role to go to the children's parents, or a third party, such as a solicitor? CGT would still apply, if relevant.
Do you think the grandchildren actually want to own a rented-out flat when they come of age? How would you feel if the house actually lost value between purchase and sale? What if it could not be sold when the children needed the money because the market in your area was poor? Or the tenants wouldn't move out and you had to take them to court?
Of course, you may have answers to all the above questions, and owning a second property may hold no fears for you. But I do wonder why you particularly want to buy a house for minor children (rather than any other type of investment), and if you have fully considered the burdens and responsibilities that being a landlord might bring.
Over the past several years property came to be considered a one-way street to increasing your wealth. The more recent property slump has proved that it isn’t, and that many people can be lumbered with a large, illiquid, depreciating asset that they would rather be shut of.
Property investment can still give people a good income and many people are successfully taking advantage of the increased need for rented homes. However the current market is not for novices.
You should consult an independent financial adviser to discuss your financial needs and how best to set money aside for your grandchildren. It may be that you do end up buying a property, but you should consider other investment vehicles, too, before you finally decide.
* Read Annie Shaw's money articles every month in Saga Magazine.