Helping your children buy property

There is no doubt that getting a foot on the property ladder is becoming increasingly difficult for younger generations. Rising property prices, the stagnation of wages and the requirement for larger deposits are just a few of the hurdles that stand in the way of property acquisition.

As a result, the ‘Bank of Mum and Dad’ is often called upon to provide substantial financial assistance to children who are investing in property. However, sufficient thought is not always given to the potential risks to family wealth that can arise as a result.

Gifts to children can often be put at risk if the child concerned runs into financial difficulties in the future or has a personal relationship breakdown. Following a relationship breakdown, it is often the case that some assets are shared with the partner even if there was no marriage or formal civil partnership.

The purpose of this fact sheet is to highlight some of the potential gifting structures which are available to parents who choose to contribute cash towards a property purchase. The options which are detailed below are only intended to represent a summary of planning opportunities that may be available with a view to protecting family wealth.

More detailed legal advice should be taken to ensure that any proposed course of action is suitable for you and so that you are aware of any tax consequences that may arise.

In respect of all the options listed below, it is assumed that the child in question is aged 18 or over.

1. Gift of cash to a child

This is one of the most common forms of gifting.

Parents can make an outright gift of cash to their child to fund a deposit on a property, contribute towards the purchase price or fund the property purchase in full. The child would be the sole owner of the property.

This is a simple and transparent process. The child will have outright control and ownership over the property. However, if the child enters a relationship that later breaks down, there is a risk of assets being lost to an estranged partner. Furthermore, if the child has future financial problems, there is a risk of assets being lost to creditors. Outright ownership also gives the child power to sell the asset whenever he or she wishes without consultation with the parents.

In this scenario, the donee should give serious consideration to trying to protect their own beneficial interest in the property by entering into a declaration of trust and/or a cohabitation agreement, pre-nuptial agreement or post-nuptial agreement.

However, there are some tax benefits available to the parents in adopting this strategy:

Potentially Exempt Transfer (PET)

The gift is considered to be a PET for UK Inheritance Tax (IHT) purposes and it will fall outside the parent’s estate, in full, after seven years have passed from the date of the gift provided the parent has not received any benefit from the sum given away. This can result in a significant IHT saving for parents whose estates are over the current IHT allowances as IHT is currently charged at 40% on the value of assets over the available reliefs.

Capital Gains Tax (CGT) — Principal Private Residence Relief (PPR)

Assuming the child occupies the property as his or her main residence, throughout the child’s period of ownership, any capital gain arising on disposal of the property will be exempted from CGT by Principal Private Residence Relief.

2. Joint ownership (including loans)

If a property is purchased jointly by the parents and the child, then in the event of a relationship breakdown for the child, the part-owned by the parent/s is likely to be protected, assuming the property was not bought at a time when relationship problems were anticipated. In addition, a property owned by more than one person can’t be sold or mortgaged without the agreement of all owners.

One of the drawbacks to this strategy is the absence of PPR relief in relation to the part-owned by the parent. Any gain arising on a disposal of the parents’ interest during their lifetime will therefore attract a charge to CGT. Another disadvantage is a potentially larger charge to Stamp Duty Land Tax (SDLT) which would arise as a result of parents acquiring an interest in a second property.

If it is considered to be preferable (for CGT and SDLT purposes), for the property to be held in the sole name of the child, parents could instead choose to protect their interest in the property by making a loan to the child and taking a charge over the property. This can be very simple to achieve if a mortgage is not required to part-fund the property purchase and it offers a guarantee to the parents that their contribution to the purchase is protected.

However, joint ownership in either sense does mean that the property interest owned by the parent(s) or the loan receivable by them is still part of the parents’ own estate for IHT purposes and may attract IHT at 40% on their deaths without further planning in the future.

3. Buying property via a family trust

If proactive estate planning has already been undertaken by the parents, it may be that a family trust is already in existence. If that is the case, it is worth considering buying the property through that trust. It is usually more difficult for trustees to obtain commercial bank mortgages and so in practice, this option works best where the trustees can buy the property outright with cash in the trust fund. It is important to note that the trust referred to here is a UK trust, of which the settlor is specifically excluded and trustees have discretionary powers in relation to all beneficiaries.

If there is no existing trust in place, it is possible for the parents to create a trust by each making a lifetime transfer. If the parents have not made any transfers into trust in the previous 7 years, they could each transfer up to the nil rate band allowance of £325,000 (£650,000 in total) without there being an immediate charge to IHT. The sums transferred are chargeable lifetime transfers (CLT) for IHT purposes and as such, if the parents transfer more than their available nil rate bands for IHT, the excess would be subject to an IHT charge of 20% at the time of transfer. For that reason, trusts are often limited to a maximum of £650,000 initially.

There can be future charges to IHT at a maximum rate of 6% if the property value exceeds the nil rate band allowance on each 10-year anniversary of the trust and ultimately when the property is transferred out of the trust to a child/grandchild.

If the purchase price of the property exceeds the total sum available from the trust, then any shortfall could be transferred by way of a loan if the parents have the cash available to do so. A loan is not a chargeable transfer for IHT purposes but must be properly legally documented with reasonable repayment terms.

Holding assets within a trust enables the trust assets to be ring-fenced and protected, offering better protection if a child later has financial or relationship issues.

By purchasing a property through a trust structure, the trustees can allow the child to occupy the property but the child neither owns nor has direct control of the property.

The trustees are likely to qualify for PPR exemption from capital gains tax if they decide to grant the beneficiary a right or licence to occupy the property and they do so as their main residence for the entire period of ownership.

If ultimately the property is put to another use, such as being let out by the trustees, the trustees will pay income tax on the rental income at the highest rate of income tax, currently 45% for the 2019/20 tax year and CGT on any chargeable gain arising in the year of disposal is charged at 28%.

For family trustees who can afford to fund a property acquisition, it is important to understand both the short- and long-term objectives for the property before embarking on this strategy. For cases where it is appropriate, the trust can be an attractive proposition as it achieves the joint objectives of putting the value of the property outside the parent’s estates whilst keeping the property out of a child’s personal asset base.

4. Using a limited company

Although setting up a company is now often considered at the same time as the possible creation of trusts from an estate planning perspective generally, ownership by a company of residential property for a child’s occupation is unattractive from a tax perspective. This is essentially because a company owning a UK residential property is subject to the Annual Tax on an Enveloped Dwelling (ATED), a charge which is set in line with the valuation bandings for the property.

In a nutshell, all residential property worth more than £500,000 at 1 April 2017 is subject to an annual charge starting at £4,400 for 2024/25 and £4450 for 2024/25. As at 2023/24 The SDLT payable by a company acquiring a UK residential property worth more than £500,000 for occupation is charged at the rate of 15% and on top of this, the individual in occupation will have a benefit-in-kind charge on the benefit of rent-free occupation.

Which option is best for you?

The most appropriate solution will differ in each particular case as it is dependent on the overall family circumstances and also the level of willingness to accept the particular tax costs attached to the chosen solution.

If the main motivation is asset protection, a trust structure is usually the best option and the tax costs are potentially manageable. The 6% maximum IHT anniversary charge is often modest and significantly better than the alternative - 40% on death if the property is held personally.

There may be more SDLT to pay on acquisition by a trust than directly by the child and there will also be some administration costs associated with running the trust. That said, some tax charges and administrative expenses could be seen as a price worth paying to protect family wealth.

Options in brief

Detailed below is a brief summary comparison of the tax position under the options outlined above as of April 2024:

Personal ownership — child and/or parent

IHT: yes, 40% on death in the individual owner's estate

CGT: yes, 24% unless PPR relief exempts whole or part of the gain

Income tax: yes, if property is later rented out and gives rise to rental profits. IT is charged at individual's marginal personal tax rate. Tax rates are 20%, 40% or 45%

SDLT: yes (rates vary)

Trust ownership

IHT: yes, for trustees 10 year and exit charges, but maximum rate of 6%. No 40% rate

CGT: yes, same as above, 24% unless PPR exempts whole or part of gain

Income tax: trustees pay income tax at 45% on rental profits

SDLT: yes (rates vary)

Company

IHT: yes, 40% on value of company shares held by shareholder at individual's death

CGT: no but ATED payable instead

Corporation Tax: gains taxed within company profits. The rate is currently 25%.

Income tax: no but yes on dividends at shareholders personal tax rate

SDLT: yes, 15% if property worth more than £500,000 and rates vary

If you are considering purchasing a property for your child or need assistance with estate planning, please get in to touch to discuss how we can help you.