Buying Property for Children
In many parts of London, property price growth now means many young people cannot easily buy. However, the idea of giving large capital gifts to a young adult can be daunting. What if they sell the property and use the cash unwisely or what happens if they marry and the relationship breaks down? These and other potential pitfalls are some of the reasons that outright large gifts are not always attractive.
Sometimes clients therefore own the property directly themselves and allow the children to occupy it; However, if the parents already have a large estate for inheritance tax, this has done nothing to reduce that problem. The property is owned by them and still in their own estate. In addition, any future gain on disposal of the property is not subject to main residence relief since this will not be available in these circumstances.
The solution is sometimes to consider the use of a trust. Each parent can transfer up to the nil rate band for inheritance tax into trust for the trustees to purchase property. The nil rate band is currently £325,000 and this means parents can together transfer £650,000 into a trust. If the purchase price is more than this, the parents can always loan monies in addition to the trustees or the trustees can take out a mortgage subject to finding a suitable lending facility.
There can be many benefits in using a trust.
The parents will be excluded from benefitting from the trust. After seven years from the date of transfer of funds to the trust, those funds have fallen out of the parents’ own estates thus reducing their overall inheritance tax liability.
There can be IHT charges within the trust on each tenth anniversary or when property leaves the trust but these are often much smaller than in the parents’ estates.
The property which has been acquired by the trustees is not part of the children’s estate but is owned by the trustees and they control that asset. They can allow a child right to occupy the property for example.
The trust offers protection of the asset in question. The asset belongs to the trustees and not to the child personally. Consequently, the trustees and not the child has control over the asset and the child has a right to occupy it only. This can be invaluable in a situation where a child’s relationship with a partner may break down, for example.
The future disposal of the property will give rise to a capital gain if the property has risen in value. The gain will be sheltered from capital gains tax to the extent that Principal Private Residence relief is available. PPR relief should be available if a child occupies the property.
There are some formalities involved but if you would like to talk to us further on this point please contact a member of our team or your usual Mercer & Hole contact
Date: 8th January, 2015
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