‘Oh how time flies’ or so the saying goes, and in respect of growing children I would tend to agree; the jump from toddler to teenager seems to happen in a flash and before you know it they are off to University, dipping into your savings to fund their adventure.
For the parents the costs can just mount up with university fees, rents and living costs to provide for! The fear for many parents is that their son or daughter’s first real experience of living away from home will involve very grotty houses with grotty mattresses, dodgy landlords and paying extortionate rents for the privilege. Even though this isn’t the case for the majority, many parents are taking matters into their own hands. When they examine the current rate of return on their savings accounts, they are opting to purchase a property for their child to occupy whilst they experience student life.
Probably the last thing on their minds when they make this commitment is to structure this purchase in a tax efficient manner. However, this is exactly what should be happening to ensure that the eventual sale of the property will be free from Capital Gains Tax. Furthermore, the property could be held as an investment for a number of years after the child has moved on to their new career, and still be free from Capital Gains Tax.
So how is this possible? The structure involves creating a trust with your son or daughter as the main beneficiary and where the parents are installed as trustees. The parents can then either buy the property and transfer it into the trust or transfer the cash to buy the property into the trust so that they, as trustees, can make the purchase in the trust. If the property was bought a while ago and has increased in value you will need to consider the capital gains tax that will be payable when the property transfers into the trust.
Probably less of an issue is the limit on the value of the property that can be transferred into a trust. At £650,000 this is not likely to catch many student properties but if it is a larger property because you intend to rent other parts of it to generate an income you’ll need to consider this limit carefully as there is a 20% charge on the excess over £650,000. If you do receive rents these will be taxable in the trust and suffer the 50% income tax rate but when the income is transferred to a beneficiary who pays tax at a lower rate the tax can be reclaimed.
The main benefit of this planning is undoubtedly the ability to secure main residence relief and also letting relief enabling huge tax savings to be made. If this planning is not undertaken the gain on the property when sold would be chargeable at 28% if you are a higher rate taxpayer, which can amount to a significant tax bill.
This planning does require professional advice to make sure it is implemented properly but if you are intending to hold the property for some time the savings can be very worthwhile.
Graham Poles - Tax Director
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