Alison Hall, a partner in our private capital department, answers questions surrounding ownership of second properties and the use of trusts to minimise the tax liability.
Many people own more than one property. This may have arisen due to historical reasons for example, spouses may each have brought a property to the marriage, houses may have been inherited from parents or more increasingly, parents have bought properties for children to live in while they are at University or as part of a “pension plan” for the future to produce a rental income.
We answer some of the common questions raised in connection with ownership of second properties.
Q. Can I give the property to my children now?
A. You can give the property away to your children if they are adults, or if they are minors, you can declare a bare trust of the property. This means that the deeds stay in your name but you have given the property away for tax purposes. The disadvantage to such a gift is that you may trigger a Capital Gains Tax (CGT) charge if the value of the property has increased since you bought it.
Q. Can I do anything to minimise the CGT liability?
A. Yes, if only one parent owns the property, they can transfer half to their husband/wife/civil partner and they in turn can give the property to the children. The advantage to this is that each parent has an annual exemption (currently £10,600) from CGT. If the gain is less than £21,200 there would be no CGT charge.
If the gain is more than £21,200 the property could be transferred into a trust, rather than to the children outright. This allows the gain to be held over and therefore you defer the CGT until the property is sold.
Q. Can I give more than one property to the trust?
A. Yes but if the value exceeds the Inheritance Tax threshold (currently £325,000) there is an immediate Inheritance tax charge on the excess at 20%. Both parents can give up to £325,000 without the tax charge.
Q. If I give the property to a trust and one of my children dies what happens to it?
A. If the property is in trust then the death of a child does not have an impact on the property. Similarly, if a child was to be declared bankrupt or to be involved in divorce proceedings, the property should not be taken into account in these proceedings.
Q. Can I give the property away but still receive the rent?
A. This can be done, although this involves a more complicated way of gifting a share of the property away and cannot be used in conjunction with a trust.
Q. If I give the property to trust, can my children ever own it?
A. Yes, the trust can be brought to an end at any time and the property transferred to your children. The gain can still be held over and no CGT will be payable until the property is sold. (This assumes the children are over the age of 18).
For further information or advice please contact Alison Hall on 0191 232 8345 or email: Alison.Hall@hay-kilner.co.uk