Real Estate
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.