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Place trust in your second home
- AuthorWilliam Ware
Many people looking to get onto the property ladder for the first time are struggling as they face hefty deposits and tough mortgage acceptance questions. Even with schemes such as Help to Buy the prospect is a daunting one, and some parents are stepping in to assist. William Ware, Private Client Consultant, here advises how parents can buy a second property for their children to live in while they save for their own home, and can do so without paying Capital Gains Tax (CGT).
“While parents may have considered this in the past, the thought of additional CGT as been a deterrent,” begins William. “The current legislation however does give ways to avoid this, making the proposition an attractive one. It is unclear how long it will be before the law changes and owners of more than one property face significant CGT bills, but action now using trusts might be a sensible option.”
There are two popular types of trust that are available in this scenario when parents want to provide a house for children without giving the children absolute ownership: either a life interest or a discretionary trust. “The trust is set up with parents named as trustees, making the deposit payment into the trust,” William explains. “The trustees then take out the mortgage. The discretionary trust does offer some additional flexibility in terms of who the occupier of the property might be, but ultimately both trusts ensure that the child or children as beneficiaries can live in the property rent free as their principal private dwelling.”
It’s this that is the key to avoiding CGT. “When the beneficiary moves into the property, this activates their Principal Private Dwelling Relief and it’s this that creates the CGT exemption,” explains William. “This exemption lasts all through the period of ownership, as long as the named beneficiaries have been resident in the property during the time. In the situation that the children vacate the property, the parent has a short period of grace to sell it before CGT liability would be applicable.”
These rules apply if you are looking to buy a property, not if you have already bought one. For existing properties to be transferred into trust, different considerations apply but there may be some benefit depending on the length of time the property will continue to be occupied by the children.
William concludes, “There are many different situations that could benefit from setting up a trust to avoid or defer CGT, and this is before we consider inheritance tax implications. For those parents who are looking to help their children onto the property ladder it’s important you start looking at your different options now, particularly if the parents are older and are thinking of some additional Inheritance Tax savings.”
For more information on life interest or discretionary trusts to help your children buy their own home, you can contact William or the other members of the Private Client team on 01329 222075 or visit the website www.warnergoodman.co.uk.
This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice. All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.