Wealthy families will be able to buy properties for their offspring and avoid the higher rates of stamp duty thanks to a loophole involving the use of trusts.
It is being reported that there is a surge of interest from people seeking advice on how to use the strategy.
The tactic will suit those who previously would have bought a buy-to-let in their own name but earmarked it to give to their child in future.
By buying property through a trust, the taxman will treat the trust’s beneficiary as the property buyer. Provided they don’t own another property, the lower rates would apply.
Tax increase like this invariably lead to behavioural changes among taxpayers.
There are very good reasons to use trusts when buying property for children. The stamp duty changes mean trusts could make more sense.
The Government has made it clear that it doesn’t want people doing buy-to-let. Since buy-to-let was a major way in which families bought homes for their children, they need to find other routes.
There could be pitfalls however, in the form of inheritance tax charges or other knock-on taxes.
You need to be clear that any stamp duty saving isn’t outweighed by other tax consequences.
The following explains how the trust concept would work.
Buying property for adult children
Where children are over 18 the simplest option is to give the child the money with which to buy the property.
That way, provided this is their only property, they will payer the lower stamp duty rates.
But not all families are keen to entrust young adults with full responsibility for valuable property.
Where the parent wants to keep control a form of trust would need to be used where typically the child gets to keep the income, but has no power over the property itself. That remains with the trustees.
I would advise parents to use trusts if they want to keep control of assets in any case.
In the common scenario where parents have adult children at university, and where there is a wish to buy-to-let they could use a bare trust or set up a formal trust with the adult child as a “life tenant”.
By that means the parents can keep control of the property.
But it is tax-efficient from a capital gains perspective, because if it is the main home of the child it will qualify for their capital gains tax relief.
But it won’t work where your children are under 18
In the original notes no reference was made to the age of the trust beneficiaries.
But when the detail was published it appears HMRC saw the possible use of this and sought to close the loophole where younger children are concerned.
The legislation makes a special case for trust beneficiaries who are minors – it confirmed that where the parents are trustees and own other property, the higher rates would apply.
Minors cannot own property directly, so some form of trust is a necessity if a child under 18 – rather than their parents – is to own it.
There is thus an incentive to wait until the child is over 18 and set up a trust then.
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