How to invest in property for your children, and pay no Capital Gains Tax

If you are interested in buying property for your child, but are concerned about the expense, there are ways to reduce costs.

There is an opportunity to invest your money through a trust, rather than buying privately, which means you won’t be charged Capital Gains Tax when the property is sold.

Legislation around CGT has undergone much publicised change in recent years, however this loophole is still legal. It also allows you to retain the CGT exemption on your own home.

This works by setting up a trust and loaning, not gifting, the deposit to that trust. Setting up a trust costs little and is easily done for a small fee by a lawyer.

In setting up the trust you name your child, or children, as beneficiaries. You then lend the deposit for the house to the trust, from which it is paid. It is likely that you will have to act as a guarantor for the mortgage as few providers will agree to lend to trustees.

When you come to sell the property there is an eighteen month window between the last named beneficiary moving out, and the point at which CGT will start to accrue. There is no limit to the gains that you can take out of the sale of the property, and this is income tax free.

Depending on your own circumstances you may wish to make a single child, or multiple children beneficiaries. There are different types of trust to choose from.

A life interest trust allows you to name a single person as a beneficiary. If you choose to set up a trust like this for one child, that child becomes known as a life tenant. This means that they have the right to live in the property rent free, and have a right to earn income from the property.

A discretionary trust allows you to name any number of people as beneficiaries. This allows you to include all your children, if suitable. All beneficiaries similarly have the right to live in the property rent free, and can move in and out as they wish. With a discretionary trust there is no automatic right to earn income, although this can be added.

As beneficiaries, when each named child moves in they trigger their own principle private residence relief. It is this relief that exempts a home-owner’s main property from CGT. For as long as one or more of the named beneficiaries of the trust are in residence CGT is not payable. This does not affect the principle private residence relief on your own home. This is ideal for periods of study, especially where several siblings are likely to study in the same city.

If you are considering buying in 2015, for family member or as an investment opportunity and want advice get in touch with our expert team at Cairn. We offer specialist advice for the student market and give you advice in order to get the best return on your funds. You can also get in touch with us via email, or by calling us on: 0141 270 7878. Finally you’ll find us on Facebook,Twitter, and LinkedIn where we are happy to answer any questions you may have.