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The Bank of Mum and Dad! Buying property for children

Shared from Tax Insider: The Bank of Mum and Dad! Buying property for children
By Jennifer Adams, August 2024

Jennifer Adams looks at different methods and tax implications of parents buying property for children. 

Buying property for children can be a strategic way to secure their financial future. However, it is essential to understand the various methods available, and their associated tax implications.  

There are several ways parents can help their children buy their own home, for example: 

  1. parents purchasing the property outright or jointly with the child; 

  1. gifted deposit; 

  1. a loan; 

  1. placing the property in trust; or 

  1. buying via a company. 

1. Buying outright or jointly 

If the parent buys the property, which is gifted to the child shortly thereafter, there should be no capital gain tax (CGT) to pay, provided there is no increase in value between the dates of purchase and gift. A CGT charge may be relevant If the gift is made sometime after purchase. Even if the property is given as a gift with no monetary transaction, CGT will be based on the market value at the time of transfer, as if the property were sold at its market value. 

Usually, no stamp duty land tax (SLDT) is payable if the property (located in England or Northern Ireland) is gifted outright; but if the property is transferred with an outstanding mortgage, SDLT may be due on the value of the mortgage assumed by the recipient. However, the gift will still be treated as part of the donor's estate for inheritance tax purposes (IHT) purposes after the date of the gift even though it has been gifted out of the estate into the child's name, unless the parent survives seven years (i.e., such that the potentially exempt transfer (PET) becomes exempt). If the parent survives for more than three years but less than seven after making the gift, taper relief may reduce the IHT liability. 

Where the property is purchased jointly with the child and becomes shared property, the main drawback is the additional SDLT payable. SDLT will be due on purchase, the amount being calculated based on the proportion of the property each party owns. If the parent already owns a property, the child’s property will count as the parent's second home, with an additional 3% SDLT charge being payable.  

Should the property be sold, each owner will be liable for CGT on their respective share of any gain. As part of the property will be owned by the child and they have lived in that property as their main residence, their share will be exempt under the principal private residence relief rules. However, any gain arising from the disposal of the parent’s interest during their lifetime will attract CGT at 24% (for disposals in 2024/25). The IHT position is that the owner's respective share in the property is included in their estate separately. 

2. Gifted deposit 

Most parents do not have sufficient resources to purchase a second property outright for their child and so usually gift their children cash, either to purchase the property in the child's name or to make up any shortfall in the deposit. No SDLT will be payable on the gift, with the only tax implications being under the IHT rules should the parent die within seven years. 

If the property is being purchased by the child with their partner or friends, the gifted money can be protected in the event they split by creating a deed of trust. Such a document ensures that the child retains ownership of the gift. If the property is sold, the deed outlines how the proceeds are divided, thereby ensuring that the initial gift is accounted for before dividing the remainder according to the ownership shares. The deed can also clarify if the money is a gift or a loan, and if the latter, when it needs to be repaid.  

3. Loaned money 

Another option is to lend money to the child to purchase the property in their own name. A loan agreement should be drawn up, setting out the interest (if any) to be paid on the loan and either the date of repayment or confirming that the loan is to be repaid on any subsequent sale. A loan is not a chargeable transfer, but it should be properly legally documented with repayment terms. 

The loan would need to be declared to a mortgage lender if one is involved in the purchase (i.e., if the loan is to help with the deposit), which could affect mortgage affordability calculations. Some banks will not accept a borrowed deposit, as the money comes with strings attached. 

4. Place property within a trust 

Children under the age of 18 years are not legally allowed to own property in their own name. Therefore, it is usually held under a 'bare trust', with an adult acting on their behalf. However, when the beneficiary reaches age 18, they have the right to demand the property, so there is little protection from such a claim. Assuming the child resides in the property as their main residence, no chargeable gain will arise on sale under the principal private residence relief rules.  

The main advantage of using a more formal trust structure (e.g., a discretionary trust) is that it is a separate vehicle, enabling the property to be protected. The trustees can allow the child to occupy the property and the trustees can pay all property maintenance costs, but the child neither owns nor has direct control of the property.  

Parents can provide funding by making a lifetime transfer into the trust up to the £325,000 IHT nil rate band limit each (i.e., £650,000 in total), subject to not having made transfers in the previous seven years (i.e., a PET). If the gift exceeds their available IHT nil-rate bands, an immediate IHT charge would be payable at 20%, with another 20% to be collected if the parent dies within seven years. Therefore, if the property costs more than the total sums transferred, the parents would be advised to transfer the balance as a loan, if the parents have the cash available to do so.  

The main tax relevant to trusts is IHT. A trust's assets do not form part of an individual’s estate; however, an IHT charge is levied every 10 years (the ‘10-year charge’) to compensate. The tax rate is 30% of what is termed the 'effective rate', which is applied to an imaginary cumulative total, comprising the value of the trust assets plus the value of any assets that have exited from the trust within the previous 10 years (otherwise, those assets would avoid the charge). The maximum IHT rate is 6% (i.e., 30% x 20%). The theory is that if there is a 6% charge every ten years for 70 years (i.e., in one  lifetime), there will be a 40% charge overall. Trust property does not form part of the beneficiaries’ own estates for IHT purposes, provided the settlor is expressly excluded from benefit. 

Trustees usually find it harder to obtain commercial bank mortgages, so in practice, this option of placing a property within a trust works best where the trustees can buy the asset outright with cash they already have. 

5. Buying via a company 

Ownership of residential property by a company is unattractive for properties valued at more than £500,000 if considered solely from a tax perspective. Not only is SDLT charged at 15% on residential properties on a purchase costing more than £500,000, but there is also the annual tax on enveloped dwellings (ATED) charge to consider. ATED is charged on company-owned residential property worth more than £500,000 of an amount starting at £4,400, increasing in bands to £287,500 for properties worth more than £20m.  

Any gain made on sale will be charged at corporation tax rates. Transferring ownership by selling company shares rather than the property can defer CGT but may involve complexities in share valuation.  

Practical tip 

The possibilities outlined above are usually relevant to parents who either have, or have access to, spare money. Many parents are not able to lend or gift cash to their children and may have to take out a guarantor mortgage, putting their savings or property up as security with the risk of default. Specialist advice is advised. 

Jennifer Adams looks at different methods and tax implications of parents buying property for children. 

Buying property for children can be a strategic way to secure their financial future. However, it is essential to understand the various methods available, and their associated tax implications.  

There are several ways parents can help their children buy their own home, for example: 

  1. parents purchasing the property outright or jointly with the child; 

  1. gifted deposit; 

  1. a loan; 

  1. placing the property in trust; or 

  1. buying via a company. 

1. Buying outright or jointly 

If the parent buys the,

... Shared from Tax Insider: The Bank of Mum and Dad! Buying property for children