There are some smart and not so savvy ways for children to buy a property for their mother and father.
Property: Parents' helpers | 05 March 2015
It’s a topsy-turvy world when traditional habits and social patterns go into reverse. In Britain today, while it is still more common for parents to buy property for their children, wealthy children are increasingly doing the same for their parents. For those who would like to do this, it pays to think carefully about how to achieve this goal.
Soaring house prices have prompted many parents to put their hands in their pockets simply to help their children onto the housing ladder, but there is another relatively recent phenomenon in the UK housing market; self-made children are finding themselves substantially wealthier than their parents, and want to help them in their old age by buying somewhere for them to live.
There is a variety of ways to structure such a purchase, and each approach has different implications for Inheritance Tax (IHT), Capital Gains Tax (CGT) and care fees. The first, and the most obvious, is for the child to buy the property in the parents’ names, thereby making it a thoroughly generous gift. This route does have some shortcomings, however; one is that the property may be subject to IHT on the parents’ death, which may or may not be far off. It also means that, after the parents have died, the child has no control over who receives the property.
There is also the ticklish issue of means assessment for purposes of care fees. If the child is buying them a home, it is quite possible that the parents are not over-endowed with assets, and may qualify for help with any care fees, but if the property is in their name, it will form part of their assets for any such assessment, taking them decisively over the threshold – £23,250 in England, and similar levels in Wales, Scotland and Northern Ireland. Assets above the limit mean that they may have to pay the full cost of their own care.
If they are married and both living in the property, the local authority cannot include it in the means assessment, but it can, and will, if one of them dies or leaves the home to move into sheltered or residential care.
In my name
Another option is for the child to buy the property in his or her own name, however, this approach has one significant disadvantage; as a second home, the property will not qualify for Private Residence Relief. This tax relief means that CGT does not have to be paid on the gains from the sale of a main home if it has always been lived in by the owner.
With this arrangement, on the death of the parents, the child will be left with the property and, under the circumstances, may well consider selling it. At that point, with very limited exceptions, they will be liable to CGT at 18% or 28%, depending on the size of the gain and whether they are a basic or higher rate taxpayer.
There is a way round this conundrum, which is to set up a trust for the benefit of the parents for their lifetime. If the child then lends money to the trust, the trustees can use these funds to buy a property. The child and the parents could be trustees, so that they are all involved in decisions regarding the property. As this is a loan and not a gift, no value has been passed from the child to the parents, so the value of the property will not be subject to IHT on the parents’ death, nor should it form any part of their assets in a care fees assessment.
On the parents’ death, the child can call in the loan, making sure they get their money back regardless of the terms of the parents’ Wills, or the trust could be written in such a way that the grandchildren – the child’s own children – are also beneficiaries. Finally, using a trust means that Private Residence Relief can be maintained and CGT will not have to be paid on a future sale, as long as a parent has been living in the property.
N.B. - Trusts are not regulated by the Financial Conduct Authority - The levels and bases of taxation and reliefs from taxation can change at any time.
For more information, visit St. James's Place Wealth Management.