dental banner

“ We only act

for dentists

Help with the property ladder

With rising property values, it is becoming increasingly hard for young people to get a foothold on the property ladder. This article sets out a number of ideas that may be of interest to Principals who aim to help their children, or for Associates intending to “tap” their parents!

As with everything in life, there are no free lunches therefore actions carry risks. There are three main approaches.

Gift Of Cash

This is probably the simplest and most transparent solution. An unconditional cash gift could meet a deposit or an outright purchase. There could be some Inheritance Tax (IHT) benefits, subject to certain conditions being met. The gift is a potentially exempt transfer (PET) and falls out of the parents’ estates for IHT purposes in full after seven years have passed from the date of gift as long as the parents have not received a benefit out of the sum given away.

The key disadvantage is that outright control and ownership is given to the child. The child could sell or mortgage the property which could be the subject of conflict, or the child could enter a relationship that subsequently breaks down thus risking assets being lost to the estranged partner.

These risks can be mitigated by joint ownership as a property owned by more than one person can only be sold or mortgaged by agreement of all parties. On the other hand some of the tax advantages are lost. On the sale of the property, the gain relating to the parents’ share would be subject to Capital Gains Tax (CGT) at a current rate of 28%. They wouldn’t qualify for the Principal Private Residence relief (PPR). 

Additionally, the parents would be acquiring an interest in a second property that has implications for SDLT (stamp duty) i.e. the additional 3% SDLT on top of the rate applicable to the value of the property. This can be mitigated by the parents lending rather than gifting the child the cash, but the IHT benefits would be lost.

Acquisition By A Family Trust

This option works best where the trust can purchase the property outright as the trustees may have difficulty in obtaining a mortgage.The trust must be a UK trust and the parents (settlors) are specifically excluded. The trustees have discretionary powers over the children (beneficiaries).

A trust is a completely separate vehicle enabling family wealth to be ring-fenced and protected. The parents can each transfer up to £325,000 each (£650,000 in total) to a trust, subject to them not having made transfers in the past seven years. The transfers are not PETs and if the sums transferred are higher than their nil rate bands for IHT, the excess would be subject to an IHT charge of 20%.

A trust would alleviate some of the concerns over giving the child outright control described above. The trustees can allow the child to occupy the property but the child neither owns nor has direct control over the property.

The disadvantages are that the trust itself is subject to tax. For IHT purposes, the trust property does not form part of the beneficiaries’ own estates. The property belongs to the trustees and there are IHT consequences for them. The trustees are subject to a charge to IHT on every 10th anniversary of the trust that, very broadly, amounts to 6% of the value of the trust assets held on that occasion. However, by using a trust, a 40% IHT charge on death if the property were still in the settlors’ estates would be saved, but it does accelerate a tax charge and the trustees may not have the funds to pay the tax. 

If the trustees ever decide to appoint the property to the beneficiary, an IHT exit charge arises. The calculation can be complex, but the rate charged does not exceed 6% of the property value at an absolute maximum.

The trustees are likely to qualify for PPR relief if the property is sold provided they grant the beneficiary the right to occupy the property and they do so as their main residence for the entire period of ownership. If the property is not occupied by the beneficiaries and is rented out to third parties, the trustees will pay Income Tax on rents at 45% and CGT on any chargeable gain at 28%

For a family who can afford to fund a property acquisition via a trust, it is important to understand the short and long term objectives for the property before embarking on this strategy. For cases where it is appropriate, the trust can work very well.

Family Investment Company

It is widely accepted that company ownership of residential property for occupation by persons connected to the company i.e. shareholders, directors and the children thereof, is unattractive if considered solely from a tax perspective.

If the property is valued at more than £500,000, the company would have to pay an annual charge on what is termed as an “enveloped dwelling” (ATED). The charge is based on the valuation bandings for the property, starting at £3,600 for properties valued over £500,000 to £226,950 for properties valued at over £20m. Additionally, a company has to pay 15% SDLT on any property purchased for more than £500,000. To add to the misery, the occupier will have a benefit in kind charge on the benefit of rent free, or below full market rent, occupation.

For IHT purposes, each shareholder has IHT exposure only in relation to their shareholding in the company and the value for minority shareholders can carry a discount so exposure to IHT on the overall company value can be favourably split across family members.

If the property were rented to a unconnected third party then the ATED charge would not apply, but the company would be subject to Corporation Tax at 19% on the rents received and any gain on the disposal of the property.

Considering the above, unless the property is 'modest' in value (less than £500,000) and likely to be rented out, this option is not going to be as attractive as some others.

In summary, there are options available, but we strongly recommend that you seek proper advice. The advice given would only be given after due consideration of your personal circumstances and aims.

For more information please get in touch with our team on dentists@moco.co.uk