Capital Gains tax rules and regulations have been a topic of conversation in recent months with several changes to Private Residents Relief (PRR) resulting in less options for dual property owners.
There is a loophole though that may suit some property investors who want to provide a home for their children.
Which property is your principle private residence?
If you are looking to or have very recently bought a second home, you will no doubt have been informed by your accountant regarding PRR.
Currently, only your “principal private residence”, i.e “your home” is eligible for PRR, a valuable tax relief exempting any financial gain from being subject to CGT. Any further properties won’t be exempt.
An alternative – Buy your children a home
There is now a possible way for a gain on a second property to also be tax free, if you buy it and let your adult child or children live in there rent free.
With many young adults struggling to get onto the property ladder this could be a way that saves you tax and provides them with a helping hand whilst they save for a deposit.
It requires (a) trust
This arrangement requires a trust, preferably before buying the property, although this tax advantage may still be available after the purchase if it can be demonstrated that conditions have still been applied outside of a formal written trust agreement.
One or both parents are set up as trustees and they personally lend the trust the funds for the deposit.
Any mortgage on the property is set up in the name of the trust, however, it is likely that as trustees you will be required to guarantor the mortgage to support the application.
A couple of types of trust are relevant and can be organised by a solicitor are:
1) Life interest trust – which allows a single child to be named a beneficiary.
2) A discretionary trust – allows any number of children to be named beneficiaries.
Which trust and who benefits?
The beneficiaries don’t in fact have to be your children, they can be any family member or indeed a friend. However, be careful before you sign up – beneficiaries have the right to live in the property rent-free and, with a “life interest trust” the beneficiary also has the right to income from the property should it arise.
A discretionary trust, for all intents and purposes, is the more flexible option as there is no limits as to the changes in occupancy, so long as they are named as beneficiaries on the trust.
What happens upon sale of the property?
Essentially, the beneficiaries trigger their own PPR when they move into the property. Upon sale, as long as one or more of the beneficiaries have occupied the property at all times, any gain is exempt from CGT.
There is an 18 month window of grace. If your children vacate the property then you have effectively 18 months to sell. During this time though the house can be rented to any tenant and the CGT exemption remains intact.
It’s complex tax planning
As CGT is a complex tax it is essential to seek advice from a financial adviser and accountant to ensure you haven’t missed anything. Further conditions apply to setting up life time and discretionary trusts and other taxes such as Inheritance tax (IHT) may be relevant, depending on your personal circumstances.