Jeremy Curtis outlines the most tax-efficient ways young homeowners can optimise the bank of mum and dad.
We are told that only 20 per cent of under 25s own a home – less than half what it was two decades ago. Prices are high of course, but so are rents making saving for a deposit beyond many. As a result, children increasingly turn to parents and grandparents for help. The question is, how best to do this – bearing in mind the perennial issue of tax.
A straight gift of cash is far and away the simplest and most tax-efficient solution. This said, a substantial sum of money in the hands of a young person (with life’s mistakes ahead of them) might trigger thoughts of trusts.
Looking first at the simple cash gift. If the parent survives the gift by seven years, then there will be no inheritance tax. Failing that the gift is brought back into account when calculating the tax on the death. There are two points to watch here:
First, the recipient is liable for any tax on the gift. This could be a problem if the whole sum has been invested; how will the child find the money for the tax? But everyone has a tax allowance of £325,000 (the nil rate band) and it is only the excess over that that becomes taxable. It is possible to include a provision in your will to cover this if it is a concern.
The second point is that it is the tax and not the value of the gift that tapers over the seven years. So it is only gifts in excess of the nil rate band that benefit from the tapering – and the taper is on just that excess. It is not perhaps as generous as you might imagine.
Capital gains tax should not be an issue on gifts of cash or on the sale of a property which has been then child’s main residence.
For a child under eighteen, it will be necessary to buy the property as a nominee (ie for all purposes the house belongs to the child, but the title is in the parents’ names). This prevents any dealing, or mortgaging, without the parents’ consent. However, be aware that this offers no protection from third parties – typically creditors, destitute future-ex-spouses etc. But tax consequences will be exactly as outlined above.
Purchasing through a trust is good because it does offer real protection, but this has its own complications. How easy, for example, will it be for the trustees to get a mortgage? It is possible, but you will probably have to look beyond the high street and be ready to pay a higher rate of interest. With interest rates so low, that may well be a price worth paying.
Remember that your available nil rate band limits how much you can contribute without an immediate charge to tax. For most that should not present a problem remembering that a husband and wife together could contribute up to £650,000.
Provided the child beneficiary occupies the property as his main residence and the trustees own just the one property, there should be no CGT on a future disposal and no stamp duty surcharge on the purchase.
If you are doing this for more than one child, the cash gift route can be replicated as many times as you wish and with whatever sums you wish. The same will be so of the nominee route. Although if one property is bought for more than one child, then Capital Gains Tax main residence-relief will require occupation by all children with an interest. That may be fine – for a while.
If the trust route appeals, one trust buying several properties is likely to fall foul of the new stamp duty rules so expect an additional 3 per cent on the purchase as a result. CGT should still be nil, provided the property (or properties) is occupied by at least one beneficiary as his main residence, and inheritance tax will be no different.
In many cases the now proud young homeowner will want to let the spare room to help pay the mortgage, or bring in a bit of extra revenue. Check that is permitted under the terms of the mortgage, and ensure there is a proper agreement governing the occupation. There will be tax on the rent although there may be some relief under the rent-a-room scheme. The rate of tax will depend on whether the income is paid to the child (whether as owner or trust beneficiary), or retained by the trustees.
Where the real problems arise is parents/grandparents buying a second home and making it available for occupation by the children/grandchildren. This saves no inheritance tax, leaves the whole property subject to CGT and additional stamp duty. The only silver lining to that tax cloud is no income tax – because surely they could expect no rental income!
Jeremy Curtis is a private wealth partner at Pemberton Greenish