Some children are lucky enough that their parents are in a financial position to buy them a property, for example while they are at university. But parents have to carefully consider their options when purchasing such a home, which will depend upon the reason for acquiring the property in the first place.
Is the aim asset protection? Do the parents want to remove value from an estate for inheritance tax purposes? This is important because while the simple option maybe to buy the property in the child’s name this leaves the property open to risks. There could be claims by the child’s future spouse or cohabitant or by creditors if the child builds up debt. It may be sensible to protect the property from such claims, but then tax considerations come into play.
The following taxes need to be thought about.
Inheritance tax (IHT) is payable at 40% on the value of the person’s estate on death. The estate charged includes the value of any gifts made within seven years before death. The nil rate band is currently £325,000 (doubled up to £650,000 in the case of spouses). Purchasing a property for a child or otherwise making available the funds to allow them to do so, is a gift.
Capital Gains Tax (CGT) may also apply on a later sale of the property on the difference between the purchase price and the sale price, subject to some limited deductions and the annual exemption (currently £12,000, although it is half of that if a trust owns the property). CGT is charged at the top rates of 18% or 28% on residential property (which of the rates that apply depends upon your other income and gains).
There are also land and buildings transaction tax (LBTT) implications. LBTT is payable on the purchase price of a property starting at 2% on the portion above £145,000 and rising in stages to 12%. There is also the additional dwelling supplement (ADS) at a flat rate of 4% on the whole price where that is over £40,000 and where the property purchased will be the owner’s second residential home. For example a property bought for £280,000 has LBTT of £3600. If ADS applies then another £11,200 would be due.
There are options available to parents:
- Take title to the property in their own names. This allows the parents to remain in control of the property, but ADS would apply if they own their own property and it would do nothing for their IHT position.
- Take title to the property in the name of the trustees of a bare trust. This may avoid ADS if the beneficiary (the child) does not own another property and certain other conditions are met.
- Take title to the property in the name of the trustees of a substantive trust. This may be good for IHT planning.
- Take title in the name of the child. This may avoid ADS provided certain conditions are met and first time buyer’s relief may apply to LBTT but the property belongs to the child and the parent has no control.
Each has advantages and disadvantages and this is a complex area of law so it is imperative to obtain specialist advice. If I can help please contact me Heather Warnock on 0141 552 3422 or by email – firstname.lastname@example.org