Big opportunity for young a investor?

by Readers Question

10:14 AM, 6th November 2015
About 3 years ago

Big opportunity for young a investor?

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Big opportunity for young a investor?

I am 20 year old student with no prior experience in property. I know the very basics through reading some books. I am very keen to get into the buy to let business and my goal is to become a full time landlord when I am older.old

My granddad owns several houses and has offered to sell one of them to my mother for £10,000 below market value. My mother would get an interest only mortgage and then give full responsibility of the house to me, as long as her mortgage repayments were being paid she does not want anything to do with it.

Hence I would have to deal with repairs, putting tenants in the house etc etc (I would also keep any profit being made on the rent) I have £4,000 in savings and would really like to take this project on board but my questions is, am I taking on too much responsibility for a 20 year old inexperienced student with only £4,000 capital?

Once I am old enough my mother will sign over the mortgage to me and I could either sell or pull my deposit out and purchase another house.

PS. I do not know the current state of the house until next week while I have a viewing also house prices in area sell for £45,000 – £60,000.

Alexander



Comments

Neil Patterson

10:22 AM, 6th November 2015
About 3 years ago

Hi Alexander,

I don't think age is any kind of barrier in either direction. You can ride a motorcycle at 16 and I am sure BTL is far less dangerous.

In this circumstance, because you are not actually doing the investing and your Mum will borrow the money and own the property you need to consider the tax implications as the profit will be taxable income for your Mum. She can pay you a reasonable amount for managing the property, but you can't just take the profit.

Ross McColl

11:28 AM, 6th November 2015
About 3 years ago

Buying at below market value could raise questions as far as inheritance tax is concerned. This will also increase any capital gains tax on the property when you try to realise its full value. The most efficient price from a capital gains perspective for the property to be sold from your grandfather to your mother would surely be the original purchase price plus your capital gains allowance. Just a couple of things to be wary of.

Alison King

11:45 AM, 6th November 2015
About 3 years ago

The responsibility will be good for you and I expect you will enjoy it and learn a lot too. Working out how to make the available money go as far as possible will be part of the challenge, so enjoy it and don't get stressed.
From a tax perspective you would be wise to look at all the options. For example, it may be worth investigating whether you can put the property in joint names and/or share the mortgage so you can divide the tax burden and also benefit from joint capital gains allowance. Operating as a business with your mother as a partner may be another option. But all this needs looking into in detail and that will be your first job I expect.

Tony Atkins

11:49 AM, 6th November 2015
About 3 years ago

I would ask your grandfather to act as your mentor for the first year or two while you find your feet. You could have regular meetings at the house, perhaps with your mother too, to go over what has happened and what you've learnt, and to review the accounts. That way you get to benefit from his experience and he gets to check everything is OK, never mind just enjoying each other's company.

I don't understand why your grandfather needs to sell the house to her at £10K below market value. Is it to save himself CGT? But as Ross says, this only exposes you to increased CGT and even IHT issues later on. If it's a question of the size of the mortgage, could he not loan or gift you and your mother the extra deposit needed?

Your mother can't just sign the mortgage over to you: the mortgage company will want to assess your income, which must typically be a minimum of £25K, confirm that the rent covers the mortgage interest, and put you on their current rates, so effectively it would be like a new mortgage.

Have you looked at taking out a BTL mortgage in your own name instead, with your mother and/or grandfather acting as guarantor. This would be much simpler in terms of ownership and taxation. I know this is possible for regular mortgages, but not sure about BTL and whether there are any age restrictions - ask a broker.

Robert Mellors

12:29 PM, 6th November 2015
About 3 years ago

Reply to the comment left by "Neil Patterson" at "06/11/2015 - 10:22":

I thought the new tax changes mean that the turnover, i.e. the whole rental income, will be taxable, not just the profit. If this is the case (or anywhere near the case) then the tax implications for his mother could be huge, just on the income basis alone, i.e. before even considering the capital gains tax and inheritance tax issues mentioned by Ross, Alison, and Tony.

Howard Reuben CeMap CeRER

14:14 PM, 6th November 2015
About 3 years ago

"my questions is, am I taking on too much responsibility for a 20 year old inexperienced student with only £4,000 capital?"

Your responsibilities as a landlord of someone's home are of course far more than " dealing with repairs, putting tenants in the house". There are hundreds of regulations relating to rental property ownership with the vast majority of them imposing health and safety obligations on us landlords. You have mentioned "profit" and of course that is a term relating to business interests and BTL is indeed a business. The main difference that we have seen over the years as financial advisers to hundreds of BTL'ers and advising on thousands of mortgages, is that property owners either fall in to the professional property investor camp, or the wannabee 'landlord' - and the difference is the way they run their business. My strong recommendation is for you to get the right people around you (legal, tax and financial advisers) and to also meet with other property investors and discuss the pros, cons, pitfalls and potential opportunities too that BTL provides.

Property118 is a great place to ask questions (as many as you like) and for people to share their knowledge, experience and advice.

The above is not written to put you off, but instead to ensure that the whole / bigger picture is taken on board too.

"Once I am old enough my mother will sign over the mortgage to me and I could either sell or pull my deposit out and purchase another house."

Mortgages are not transferable. You might be able to be added to it, or alternatively you might have to buy the property off of your mother in the way she is buying from her father. As Ross says, there are potential huge tax implications here, so you must plan this strategy with your accountant.

Bottom line though, I bet many readers here also wished they started BTL when they were 20, so good luck with your new business and keep asking your questions; none of us know it all and we're all always learning.

Whilst you're learning the ropes, you can keep updated on the everchanging BTL mortgage market here > http://www.property118.com/mortgage-sourcing/

Hope that helps

Howard

Mike W

14:56 PM, 6th November 2015
About 3 years ago

Alexander your enthusiasm is commendable BUT as others have said study the 'business' and get advice. I am not going to repeat what others have said but I will point out some errors in your post.

When an asset such as a house is transferred between related persons it has to be declared to HMRC. The reason is obvious the transfer price may not reflect the actual value of the asset and as a consequence it could be viewed as an attempt to avoid tax. CGT and IHT has already been mentioned.

Only the owner of the house will be taxed on the income so although your mother may not wish to have anything to do with it she will have to inform HMRC of her new source of income and of course make tax returns.

If you take any income off your mother in return for management then you too may have to notify HMRC of your source of income. They may consider you to be self employed.

I am not a tax expert and my comments are only made in respect of certain elements of your post. Others have highlighted other key safety responsibilities.

It is not easy being a landlord or agent. Ignorance of the law is no excuse.

Harry Chunk

8:38 AM, 7th November 2015
About 3 years ago

As other threads to this forum have pointed out I do believe it is possible for your mother to hold the property in trust for you. Strictly speaking the mortgage company would not like it but as it is between you and your mother who needs to know other than the solicitor and possibly HMRC. The solicitor will need to draw up a form of trust to get round the issue. The income you earn will need to be declared on your tax return to HMRC.

Puzzler

9:41 AM, 7th November 2015
About 3 years ago

Regarding Ross and Tony's comments about CGT: you can't set the price for CGT yourself. It is the market value at any transaction not what you actually pay. So if Grandpa sells at £10k below the market that £10k will be included in the gain taxable (although he may have other ways to mitigate it). It would not be subject to IHT as for tax purposes it has been sold not gifted. The advantage is the purchase price is therefore higher for your mother. You would have to get a professional valuation to appease HMRC.

I am wondering why your mother needs to be involved at all. Why not do it directly in a joint enterprise with your grandfather? I've not investigated this but am thinking of doing something similar for my heirs. Does he have a mortgage on the property on question?

Simon Lever

14:54 PM, 10th November 2015
About 3 years ago

To clarify the tax side of things:

Transfers or sales between connected parties (grandfather to daughter or grandfather to grandson) are ALWAYS treated for CGT purposes at market value. Therefore whatever price the property is sold at by your grandfather his CGT will be based on a sale at market value. It may be possible that his annual allowance and other capital losses brought forward would mean no CG tax to pay but this will have to be looked at by him before anything happens.

SDLT should not be a problem as the value is below the threshold.

Income tax is dependent on who receives the rent. In future the tax is calculated by taking the rents less allowable expenditure and then adding this to any other income in the year. The tax is worked out on this figure and then an allowance of 20% of the interest is deducted from the tax due. If the tax due before the deduction of the allowance on the interest is at 20% then there is no difference in the tax due from the current way of taxing the profit.

It is incorrect to say you will be taxed on the income as this is only half the story. It is wrong to say this and it shows that you do not fully understand the way things will work.

If your mother owns the property and you charge her a fee for managing it which is equivalent to her "profit" then you will have to declare this to HMRC as your income and pay tax on it. You will be able to deduct expenses of actually carrying out the work before tax is charged.

As there are quite a few things to work out here I would suggest that all 3 of you see an accountant who will be able to advise you of the various different taxes that will be due.


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