How can I help my son buy a house?

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I want to help my son get on the housing ladder. The idea is to jointly purchase a property costing £150,000. I would contribute £75,000, while my son takes out a repayment mortgage for £75,000. I do not want any liability for the mortgage and do not want my son to be able to access my invested capital, but nor would he pay me rent or interest. Can a purchase be structured like this? Could I sell him further shares of the house as his affordability improves? What are the tax implications?

Christopher Groves, partner at solicitors Withers, says that you could contribute £75,000 to the purchase of a property without the need for you to charge interest or rent to your son. You and your son should hold the property as “tenants in common” (rather than as “joint tenants”), to enable you to control the passing on of your share on your death. You should also record your separate interests in the property by way of a declaration of trust, which should cover matters such as how decisions on the sale of the property are to be made.

It should be possible for your son to take out a mortgage in his name, but the lender will require that you both give a joint charge over the property. If the property falls in value, your share could be at risk under the charge if your son does not keep up his mortgage. Unless you guarantee the mortgage, you will not be liable for any interest payments, except in the event of default and repossession.

It would be possible for you to sell parts of your share in the property to your son over time. Any gain arising on a sale may be subject to capital gains tax. However, as long as your chargeable gains in any year do not exceed your annual CGT allowance (currently £9,200), there will be no tax for you to pay. Given the values, there is unlikely to be any stamp duty on these sales, as this is not payable on transactions under £125,000.

Alternatively, you could lend your son the funds to buy the property. You could secure this loan by a second charge over the property (his mortgage company will insist on a first charge), but your capital could be at risk if your son defaulted. Instead of buying further shares in the property he could simply repay part of the loan, but you would not benefit from any increase in the property’s value.

Is compensation exempt from tax?

In 1998 my wife and I invested £60,000 in three split capital investment trusts. By 2002 all were worthless. In April 2004 we complained to the Financial Ombudsman that we had been missold the shares. The ombudsman found in our favour and in August this year we received £85,000 in settlement. In the 2003/4 tax year we claimed that the shares had a nil value and that therefore we had each realised a capital loss of £30,000. We used part of the loss in 2005/6 to offset a gain on the sale of a house. If the misselling compensation constitutes a receipt for capital gains tax purposes then we will have realised a substantial gain, even after the capital losses are deducted. I understand there is a Revenue extra statutory concession D33 covering the CGT treatment of compensation: would our compensation fall within this concession? If so, should I report the compensation on my tax return and claim the concession?

Leonie Kerswill, partner at PricewaterhouseCoopers, says you are correct in identifying that the tax treatment of the compensation depends on whether it falls within the extra statutory concession (ESC) D33. Broadly speaking, the ESC identifies and applies to compensation received under a right to action, where there is no other existing right. This is referred to as a Zim-style right, after the case of Zim Properties v Proctor. The Zim concession does not apply to compensation which derives from a statutory or contractual right.

It would appear that the compensation you received was not from a contractual or statutory right and is therefore a Zim-style right. If this is the case, the next step is to consider whether that compensation was derived from a right of action in respect of an underlying asset. If so, the compensation is taxed as though it is derived from that underlying asset. If not, it is exempt.

On balance, I think your right of action is derived from the financial advice that you relied on when purchasing the shares and not derived from the shares themselves. Accordingly, under the terms of the Zim concession, the compensation you received should be exempt from CGT.

I suggest you include brief explanations of the facts on the “additional information” of your tax returns indicating that the payments are exempt in accordance with paragraph 11 of ESC D33.

Does stamp duty apply to all gifts?

FT Readers’ Questions (November 3/4) said that when gifting shares to children for inheritance tax purposes donors should ensure stock transfer forms are “stamped”. Does this mean such gifts are subject to stamp duty?

Mike Warburton, senior tax partner at Grant Thornton, says there is no stamp duty payable when gifting shares. However, when disposing or gifting shares in a listed company, a stock transfer form must be submitted to ensure correct procedures are followed.

In some cases, you may want to send the stock transfer form to the Stamp Office to be “stamped” to note the stamp duty exemption, if, for example, you are unclear as to whether your gift qualifies for the exemption. In most cases, this is not necessary as Code L on the stock transfer form states that the conveyance or transfer of property operating as a voluntary disposition for no consideration in money or money’s worth is exempt from stamp duty.

Conflicting advice over added years

I am a 57-year-old bachelor and a member of the teachers’ pension scheme. My financial adviser suggests a transfer to a personal pension as he feels this will provide a better deal. Previously I was advised to buy as many extra years in the teachers’ scheme as I could afford – which I have done. Who is right?

Tom McPhail, head of pensions research at Hargreaves Lansdown, the financial adviser, says buying added years in the teachers’ scheme was a good place to start. In general terms, the value of the guaranteed benefits accrued through added years would be hard to match through any other savings arrangement.

It’s likely that your adviser’s argument is that your occupational scheme automatically grants a spouse’s or partner’s pension, and that because of your circumstances this is money wasted. By transferring to a personal pension you crystallise the capital value of that spouse’s pension and get to use it for your own benefit.

There are a couple of reasons why this isn’t necessarily a certainty, though. One is that you might one day find yourself needing that partner’s pension! The other is that the transfer value offered by the scheme can be something of a lottery.

The best way to judge whether they are actually offering you a decent transfer value in compensation for giving up your scheme rights is to get your adviser to run an analysis, which can produce a “critical yield”.

This is the rate of return you would have to achieve on the transfer value after it has been moved to a personal pension in order to match the benefits you had given up. A low critical yield is good, whereas a high critical yield tells you that the investments have to run fast to deliver an equivalent benefit. Anything above 7 per cent is chancing your arm.

So you should crunch the numbers with your adviser, and take a view on how much risk you are willing to accept. You should think hard before giving up the guaranteed benefits you currently enjoy.

One final thought: if you already have a substantial secure pension, and are inclined to take a small gamble, you could consider redirecting your last few years of added years contributions into either an individual savings account (Isa) or a self-invested personal pension (Sipp), leaving your main pension where it is.

The advice in this column is specific to the facts surrounding the questions posed. Neither the FT nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.

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