CGT Planning – Avoid tax if you buy your children a home
Capital Gains Tax (CGT) is charged on the sale of all assets where a financial gain is made. This includes residential property, unless, it is your primary residence, i.e. your home, in which case you can claim Private Residence Relief (PRR) to exempt the gain from tax. What if you own more than one property though? Typically, CGT will be charged and strict rules are in place to prevent abuse. However, there could be a legitimate way to avoid CGT on the sale of a second property and provide a home for your children.
PPR – no more loopholes
Until April 2015, there was the option for dual property owners to choose which property would claim PRR should it sell for a financial gain. This however, was subject to abuse so regulations have changed recently and new criteria means CGT would be highly likely on any property other than one where evidence can be provided that it is in fact your “primary residence”
Rent your second home to your children “rent free”
One alternative strategy that is completely above board is to buy a house and allow your adult children to live in the property, rent-free.
Some parents are using this as a method to assist their children through university or to provide them low-cost living arrangements so they can save for their own property deposit, something that has been difficult for young adults in recent years.
Best worked as a longer-term plan so equity has the chance to build within the property, however, depending on the property, area and personal circumstances will depend how quickly rewards can be reaped.
Buying the property within a trust
The main point with this type of tax planning strategy is that it is operated through a trust. A solicitor can set up the trust for just a few hundred pounds – it’s not typically an expensive transaction.
The following occurs:
- One or both parents become the trustees
- The parents lend the trust the money for the deposit
- If a mortgage is required, the trust takes out the mortgage – Often the parents are required to guarantor the mortgage.
- The child or children are set up as beneficiaries to the trust
Choosing which trust is best
There are a couple of options of which trust is more suitable:
- Life interest trust – has just a single beneficiary
- Discretionary trust – can have multiple named beneficiaries
The discretionary trust is a more flexible option as it allows changes in occupancy as many times as required through the period of ownership. For example, one child could occupy for three years until they finish university and then another one can take over whilst they study.
The other key difference is that the beneficiary of a life interest trust is also entitled to income from the property.
It is worth noting that the beneficiary doesn’t have
to be your child – it can in fact be a parent, other family member or even a friend.
The terms of the trust though strictly allow the beneficiaries to occupy the property rent-free, so care needs to be taken not to enter into this arrangement without thought.
The trust is best arranged prior to purchase, however, on some occasions if all criteria are being fulfilled, just with no formal documentation, there may be some flexibility to tie up the paperwork prior to sale, but take advice as it could be complex.
Beneficiaries generate their own PRR when they move into the property. Therefore, subject to at least one beneficiary occupying the property at all times, any financial gain from a sale would be except from CGT by the trust on the basis of using the PRR from the beneficiaries.
Should the beneficiaries vacate then there is an 18-month window to sell the property and keep the tax relief intact. It is even possible to rent the house to other tenants during this period only, after which there will be tax implications.
Figurit help many commercial business owners with advice on CGT. It’s a complex tax that requires bespoke advice based on your own personal circumstances. Our expert team would be happy to provide guidance to ensure you are maximising your position. Call today.
020 7376 9333