Many parents want to help their children to get onto the property ladder, but worry about giving them significant sums of capital outright. In view of the remarkable generosity of the divorce courts towards poorer spouses when a marriage breaks down, keeping control of the children’s assets through a trust may make sense. Using a trust to fund the purchase of a property can still be a very tax-efficient and relatively cheap arrangement.
Suppose that two parents (Bob and Caroline) want to buy their daughter, Alice, a property. They provide their combined IHT exempt limit, which is a total of £650,000. They fund a trust with this sum and the trust buys the property. They are the trustees of the trust and so decide whether the property is sold. Alice has the right to occupy the property and pays the outgoings. Bob and Caroline’s other children can also be beneficiaries of the trust.
The tax position of the trust would be:
* Inheritance tax:* none on creating the trust or in the first 10 years. If the property increases in value a potential charge arises on each 10th anniversary of the trust, but at no more than 6% of the value over the £650,000 settled. If, however, Bob and Caroline decide Alice is sensible and so give the property to Alice just before the first 10th anniversary, there will be no inheritance tax at all regardless of value;
Capital gains tax: assuming the property is Alice’s main residence, no CGT arises on a sale of the property or on the property passing to Alice;
Income tax: no income in the trust, so no income tax. If Alice wants to rent out a room, she can collect the income herself and pay any tax due herself;
Stamp duty: SDLT will be payable on the purchase of the property at the same rate as a purchase by an individual. No SDLT payable if the property is transferred to Alice;
Reporting: a simple form is submitted to HMRC to inform them of the existence of the trust, but no income tax returns are needed. A return would be required to give notice of the sale of the property or if the property is transferred to Alice.
The cost of the trust is therefore minimal, especially in the first 10 years. If Alice proves unreliable, Bob and Caroline can decide to keep the trust going; the IHT cost should be modest and may be an acceptable price to pay for securing the assets. Should Alice get married and the marriage later breaks down, the trust may provide protection for the capital against claims from her spouse.
A trust of this kind is therefore still very well worth considering as it is to a large extent tax neutral and provides asset protection. Care does need to be taken on the tax consequences of expenditure on repairs or improvements, and as always, advice should be taken to ensure the trust is appropriate in your particular circumstances.