Will my mum be taxed on the cash she lent me to buy my first home?

admin
3 May 2016

Q

I bought my home two years ago, but at the time I couldn’t borrow as much as I needed.

In order to help, my mother put some money into the property and we took out a joint mortgage. She has never contributed to the mortgage and I’m now in a position to remortgage the property into just my name and give my mum back the money she put in.

Will my mum have to pay tax on the money she put in? We viewed the money as a loan with an informal agreement that I would pay her 5% interest on it when I repaid. But will the taxman see it differently as I am paying her the money back and removing her from the mortgage and the deeds at the same time? Will it be seen as me buying her out? Should I hold off on repaying her in order to keep the two transactions separate?

From
RC/Leeds

A

If the HMRC views the money your mother put in as a loan, then she may withdraw it tax-free and account for the interest as an income in her self- assessment tax return.

Alternatively, she can phone HMRC (0300 200 3300), which will amend her tax code and collect the interest through PAYE. Although you have agreed a rate of interest, the rate of interest that she would be assessed for tax purposes would be based on market rates and not necessarily the 5%.

If your mother’s contribution is seen as an investment in the property so she is considered a joint owner with you, and it wasn’t her principal private residence, then she will be assessed for capital gains tax (CGT). Normally ownership in property is assumed when a person has their name on the title deeds and has taken out a mortgage in their name.

 

Your mother has her name on the title deeds and on the mortgage, so she will be assumed to own the property. Consequently, she will be assessed for CGT for the time that she owned the property.The gain will be calculated by taking her share of the market value of the property at the time when she gives up ownership less her share of the cost of the property less her share of any enhancement expenditure, less any selling costs incurred in transferring the property.

The gain is reduced by her annual allowance, which is currently £11,000 a year. You may find that when you do this calculation she has made a capital loss, so won’t have to pay tax.

If you hold off on repaying her, which means she gives up ownership later, then there is a greater risk that the gain on the property will be bigger and so your mother will suffer a greater tax bill. If she gives up her interest in the property immediately and you pay her back some years later, she will still be assessed on the gain when she relinquishes the property and not when she receives the cash.