“THE bank of Mum and Dad” is the key to getting a foothold on the housing ladder for a growing number of first-time buyers facing hefty deposit demands from lenders.
But actually buying a property for your children or providing direct finance isn’t necessarily the best way to help out. For some people there are far more advantages to using a trust to help children into the property market, according to Angela McMahon, a senior solicitor with Murray Beith Murray.
Here are her top tips on buying a home through a trust.
There are several reasons for buying property through a trust. These days it is probably most commonly used by parents as a tax-efficient method of securing accommodation for offspring attending university, or to give young adult children a “leg up” on to the property market. In this situation the children are officially known as “beneficiaries”.
A trust has to be set up before considering which property to purchase. Ideally, there should be at least three members or, as they are called officially, “trustees” (eg husband, wife and a solicitor), although other arrangements can be put in place to suit family circumstances (such as when the parents are divorced). While a trust requires professional legal structure it is not strictly necessary for a solicitor to be a trustee, albeit still advisable. Once the trust has been set up the “trustees” are then in a position to identify and purchase a property in the normal way.
The trust provides flexibility in relation to the financial arrangements used to purchase the property and the ultimate transfer of the property or its sale proceeds to the beneficiaries. By holding the property in trust, the trustees have complete discretion regarding the distribution of the property or sale proceeds on the ending of the trust arrangement.
The trustees retain complete control over the financial position for the lifetime of the trust. If buying a property for an adult child the property would have to be put in the name of the son or daughter to avoid it being classed as a “second home”, which would have tax implications (see Tip 6). If the house was in the name of the adult child, then the parent or parents funding the purchase would not have any control over the sale of the property or any proceeds.
Once set up, “the trust” can buy as many properties as are required. Take the hypothetical example of an Edinburgh family buying a flat for child 1 attending university in Glasgow. Four years later child 2 goes to university in Aberdeen, so the trust buys another flat there. When the age gap between the two children is wide enough and their time at university does not overlap as in this scenario, the trust could sell the Glasgow flat and use the proceeds to buy the one in Aberdeen. It is not necessary to set up a new trust to purchase a second or subsequent property.
Because the flat is owned by a “trust” and not by an individual, it does not count as a second home. Any profit realised on the eventual sale of the property is not subject to capital gains tax provided it has been occupied by the beneficiary of the trust.
The beneficiary is entitled to claim “rent a room relief” on the letting of another room up to the current maximum of £4,250 a year.
The gift of funds into the trust and the subsequent withdrawal from the trust are chargeable events for inheritance tax. However, that liability can be avoided with some simple structuring.
Once in place, there are significant benefits in allowing the trust to continue. For example, once the “beneficiary” leaves university and starts paid employment the trustees could purchase a larger property more suited to his or her changing needs. For some parents this is preferable to handing over a large sum as a deposit to a son or daughter.
While the property is held in trust, it does not become matrimonial. This means that in the event of one’s son or daughter experiencing a marital breakdown his or her estranged spouse will not have any claim on the property as could be the case in a situation where husband and wife were joint owners.