CGT: Buy your children a home and avoid the tax

Private Residence Relief (PPR) is a highly valuable tax relief exempting property owners from paying Capital Gains Tax (CGT) on a financial gain made from a sale of a property. This relief is available providing the property in question is their “primary residence”, in other words, “their home”. Dual property owners and property investors typically have to cough up on CGT when they sell a property and make a profit. However, there could be a legitimate way for PPR to be granted on a second home and therefore avoid CGT.

Is it your principle private residence?

Currently there is an option for dual or multi property owners to select which of their properties is their main residence and therefore eligible for PRR. From April 2015 this benefit is to be removed and further criteria apply. Essentially the ropes are tightening and the choices to property investors are being squeezed, largely to avoid abuse that has occurred in recent years.

Buy a second home for your children

An alternative solution, which could, legitimately be part of a short, medium or long term property investment plan (providing rules don’t change) is to buy a house for your adult child or children to occupy, perhaps whilst they are at university or working towards saving their own home deposit. Parents in the financial position to do so are considering this as a means to purchase a property that will (hopefully) accumulate equity over a number of years for which they can then sell for a potential gain, tax free. It doesn’t in fact have to be a second home for a child or children; it could be for a parent perhaps, or any family member or friend – but strict conditions apply so be careful.

The terms of this type of arrangement

A trust is required to facilitate the formalities. It is best to organise this in advance of buying a property, however, in certain circumstances there may be a way of still taking advantage of this tax benefit if the “terms” are practically being fulfilled already and it is just the formal contract that is missing. 1) Essentially, one parent or both parents become “trustees”. They personally lend the trust the money for the deposit and if the property requires a mortgage then the mortgage goes in the name of the trust as well. It is likely that a bank or lender would require some form of personal guarantor from one or both of the trustees too as banks don’t tend to like to lend to trusts. 2) The child or children are set up as beneficiaries and the condition of this arrangement is that beneficiaries have the right to occupy the property rent-free for the entire duration of ownership.

What type of trust is required?

A couple of trusts are relevant for this type of transaction:

A life interest trust

Naming a single person as beneficiary

A discretionary trust

Naming multiple people as beneficiaries The main difference between the two types of trust, other than the fact that a discretionary trust is a far more flexible option, is that with a “life interest trust” the beneficiary is also entitled to income from the property. A discretionary trust allows occupancy to change over the course of ownership as many times as required, as long as at least one beneficiary occupies at any one time.

Upon sale of a trust-owned property

Upon moving into the property, the beneficiaries generate their own PRR. When a sale occurs, assuming it is sold for a profit, a CGT gain would therefore be exempt due to PRR. This is on the premise that at least one beneficiary has occupied the property at all times during ownership. There is an 18-month window for you to sell the property and still retain the exemption should your children vacate. During this period the property can even be let to regular tenants, however, after the 18-month window closes, CGT would most likely be charged on a proportion of any sale gain. Capital Gains tax is a complex tax and requires professional advice, espcially for a transaction involving trusts. Figurit work with specialist solicitors and financial advisers to ensure you get the best advice. Call today if you are considering investing in a second home. T: 020 7376 9333 E: info@figurit.com

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