My husband and I took out an offset mortgage on our main home in order to buy a second property for him to use when he was working away. We no longer needed the second property, so sold it and put the money into our offset mortgage account.
Now our son wants to move in with his girlfriend, but they have only been together nine months so don’t want to commit to buying together yet. I was considering buying a property for them with the money sitting in our offset account. However, I’ve calculated that we would have to pay a stupid amount of stamp duty to do this.
Would there be any tax implications if we gave him the money to buy the house in his name? They will probably want to buy their own place in two to three years’ time, at which point we would get our money back.
If you gift the money to your son, the only tax which could come into play is inheritance tax (IHT). The gift becomes a ‘potentially exempt transfer’ at the point when you give it to your son and would be liable for IHT if you died within seven years of making the gift.
Provided you survive seven years after you give your son the money, it is exempt from IHT (see table above for the levels of tax paid).
However, what you describe seems more like a loan than a gift if you expect to get the money back. If this is the case, it is wise to document it, with a written loan agreement so everyone knows where they stand. Remember that any interest you receive is potentially subject to tax. If you write off the loan in future, this would then be a gift subject to the seven-year rule.
Your son should also consider putting a co-habitation agreement in place to protect the property if he were to split up from his girlfriend. This works in a similar way to a a landlord/tenant agreement. He should also write a will to clarify his wishes should he pre-decease you.
The seven-year rule
Gifts made before you died are called potentially exempt transfers. Whether you pay IHT depends on how quickly you die after making the gift. It takes seven years for a gift to become IHT free. Some gifts including wedding gifts are automatically exempt.
Years between gift
Less than three
Three to four
Four to five
Five to six
Six to seven
Seven or more
Mike Gordon is technical director at Rutherford Wilkinson