4 Options Available:
- Giving a gift of cash
- Buying a property together
- Setting up a trust
- Buying through a company
Giving a Gift of Cash
You can make a gift to your child which if unconditional, is free from tax at the point of transfer. This will allow your child to put the funds towards the deposit and/or purchase price of a property that they will own.
Knowing how large even deposits are, the gift would likely be a potentially exempt transfer. This requires the person making the gift, to survive a period of 7 years for it to fall outside of their Estate for Inheritance Tax purposes. This could create a tax saving of up to 40%.
As your child will own the property and assuming will then live in it as their main residence throughout the period of ownership, there will be no Capital Gains Tax (CGT) on disposal.
The downside to this option is the loss of control. You cannot make any stipulations as to the use of the funds or have an expectation of them being returned. Both of these would mean that the payment was not a gift and therefore the value would remain in your Estate.
If you child has a relationship, the property may be at risk if it fails in the future.
Buying a Property Together
Joint ownership may give you the security which gifting cash does not. Any disposal must be done with the agreement of all owners and may lessen the risk on a relationship breakdown.
As you will not be living in the property, principal private residence relief will be restricted, meaning that capital gains tax may well be due at 28% for higher rate taxpayers, subject to utilisation of annual exemptions.
In addition, on purchase of the property, it is likely to be your second property and so stamp duty land tax will be payable at an additional rate.
Both of these taxes can make this option expensive in the long term and does not achieve any inheritance tax saving.
Some parents choose instead to loan the funds to their children and place a Charge on the property. As a loan, this remains an asset in your Estate but does stop the capital gains tax and stamp duty land tax charges.
Setting Up A Trust
A UK Discretionary Trust means that the Trustees have the power to distribute funds to beneficiaries or allow the use of Trust assets. The ultimate in control.
Consider putting cash into a Trust. This is a chargeable lifetime transfer and only liable to inheritance tax at 20%, if the nil rate band has been used. After seven years and if the settlor (you) cannot benefit, then the value will fall outside your Estate.
The Trust could then purchase a property and allow a beneficiary to live in it. The Trust could also, subject to availability of funds, pay any maintenance or charges for the upkeep of the property.
As a Discretionary Trust, the value of the Trust is potentially liable to a principal charge every ten years. These are only due if the Trust assets are valued above the nil rate band. If the beneficiary resides in the Trust property throughout the period of ownership, the Trustees can be eligible for principal private residence relief. This is potentially a significant tax saving, as Trust gains are charged at the higher rate of 28%.
The Trustees are not required to charge rent on letting the property to the beneficiary but if they do then tax will be charged at 45% in the Trust.
Buying Through A Company
This has always been seen as an unattractive way of holding property. Purchasing via a company means paying the additional rate of stamp duty land tax and the cost of the Annual Tax on Eveloped Dwellings (ATED). It is important therefore to consider the value of the property being purchased before spending out on setting up a company.
In addition, an individual living in company owned accommodation can be liable to a benefit in kind charge, on which income tax will be due, if market rent is not paid.
As a shareholder in what is likely to be a non-trading company, the value of the shares will be chargeable to inheritance tax but these shares can be held by various individuals or family members, so discounts can be given to minority shareholdings.
What to choose depends on your personal circumstances and the amounts involved. Do you have more than one child? Are you likely to need to repeat this exercise again in a few years? Do you need the money back?
Whatever you choose, here at Lambert Chapman LLP our specialists can talk through your options and explain more about the consequences before leading you through the process. If necessary we will work with your existing IFA and solicitor or help with introductions.
Please get in contact for an initial chat for free.