Real Estate

GUEST ARTICLE: The Risks, Rewards Of Helping Future Generations Get On Housing Ladder

Jeremy Curtis Pemberton Greenish Partner 8 August 2016

GUEST ARTICLE: The Risks, Rewards Of Helping Future Generations Get On Housing Ladder

Co-ownership is one way that parents and grandparents might try and assist the younger generation to climb the property ladder in the UK, but there are tax traps, and this article considers a range of options.

When it comes to estate planning, a common issue faced by many families is helping young adult children to ascend the daunting property ladder. Co-ownership of property is one idea that has gained ground. However, a potential catch can come in the form of tax. This article, by Jeremy Curtis, partner at Pemberton Greenish, explores some of the potential pitfalls and opportunities that co-ownership can involved. As always, the editors of this publication don’t necessarily endorse all the views of guest contributors and invite feedback. We are grateful to the author for this analysis.

It is relatively common practice for many parents (or indeed grandparents) helping children onto the property ladder to co-own with those children. This gives those parents a stake in the property bought, a measure of control over how it is used, sold, mortgaged, etc, and the security of a nice nest-egg to cash in in later life if needed.  

But is that such a good idea?  

In terms of tax, there is no inheritance tax saving, because you still own the stake in the property. Also, there will be capital gains tax on your share when the property is sold, even if it has been the main residence of your child throughout.

You will be liable for income tax on your proportionate share of any income (for example rent) from the property.  It is tax neutral. Or it was. So what has changed?  

Stamp duty land tax 
Now anyone who owns a residential property and who buys a second - even just a share of a second - faces an additional 3 per cent SDLT on the usual rates. And notwithstanding that you are buying just a share, the higher rate applies to the whole consideration.  So your co-investing child also pays the higher rate.  To put that in context, the SDLT on a £350,000 purchase would be £18,000 rather than the marginally less heart-stopping £7,500. Even if you have put up say just £50,000. 


Risk management
ike an outright gift there is no protection with this sort of shared ownership. The child’s share is his for all purposes including bankruptcy and divorce. It is true that with your name on the title your co-operation is needed to sell or remortgage, but where there is no choice for the child, your name on the deeds does nothing to prevent a sale.  

If that risk is unacceptable, the choice is to retain full ownership yourself or buy through a trust.  

Full ownership eliminates the risk of the misfortune of the child, but is not good for tax.  There would be full CGT on sale because the occupier (the child) would not be the owner.  You still suffer the higher rate of SDLT because it is a purchase by you of an additional residence - albeit not one you will occupy. And whatever you decide to do with any rental income - for example give it to the child - it will be taxed as part of your income.  

If that doesn’t appeal, then the alternative is trusts. They give protection and tax advantages there are some complications and downsides. 

On tax, you are now making a gift and to a trust.  The seven-year rule applies, but because the gift is to a trust if you give more than your available nil-rate band (the £325,000 allowance available to each person) there is an immediate inheritance tax charge of 20 per cent of that excess. In many cases that won’t matter, particularly if both parents join together pooling their respective allowances to create a maximum £650,000.    

New trusts suffer inheritance tax charges of up to 6 per cent every 10 years and lesser charges when assets leave the trust. This is rarely a problem if the trust is wound up before the first 10 year anniversary, but can be more problematic if it is not. The charges are not very big, but like insurance and maintenance have to be met from somewhere. 

CGT main residence relief can be claimed if the property is occupied by a beneficiary of the trust. In our scenario that is almost certainly going to be the case.  

And any income from the property ought to be taxed at no more than the recipient beneficiary’s marginal tax rate (and there may be some relief from that under the rent a room allowance).  But the new SDLT rule is still there. There is scope for avoiding that (so paying just the standard SDLT rate on the purchase) by ensuring that the terms of the trust provides rights of occupation to beneficiaries who own no other property themselves. Otherwise the same additional 3 per cent will be payable.     

Trusts are not without their practical complications. For example it is much more difficult to get a mortgage so some of the attractive high street rates may not be available. And it is the trustees who own the property and are liable for its upkeep and insurance, etc. Careful thought is needed on how best (practically and tax-wise) to ensure these expenses are met.  

But in terms of preservation of wealth in the wider sense, trusts must be a good option.  

If you are more sanguine about your child’s prospects, then the best and simplest option must be an outright gift of cash to the child to enable them to buy in their own name if necessary with a mortgage. That takes money out of your own estate for IHT, ensures the child can claim main residence relief from CGT on the whole, and any income they earn from letting will be taxed at their, not your marginal rate.  

SDLT will follow the usual rules - this will not be a purchase by someone who already owns a residential property one assumes. It also gives them the responsibility of ownership, and grown-up borrowing.   
And if they are flying your nest, they’re starting to build a nest of their very own.    

 

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