Chris Williams describes potential ways to look after family members – and outlines some possible tax implications.
There are various options available when we have relatives to support and need to provide a home for them - be it a parent or grandparent, offspring or someone with a disability.
The simplest option is to buy the property yourself and let them live in it. But if you own the property for a long time and it goes up in value, you will be exposed to capital gains tax (CGT). Main residence relief applies to your own home but not one you own and allow someone else to live in, but there are ways of providing a home to someone else which will obtain relief and won’t prevent you having access to the property yourself at a later date.
Give mummy the money?
The simple solutions sometimes work best, but remember there are other taxes to consider. If you give your parents the money to buy a home they can have the CGT relief, but the house becomes part of their estate for inheritance tax (IHT) purposes. That may not be a problem now, but if they live there for a long time, house price inflation could well push them into the taxman’s clutches later. Not only that, if you make an outright gift you cannot guarantee to get it back later, because it’s no longer under your control.
Having said that, putting money out of your estate may be useful in long term planning. If your parents are reasonably likely to stay below the available IHT threshold (or ‘nil rate band’, currently £325,000) what happens when they die can be determined by their wills (e.g. to your children and grandchildren), so all the property’s value, including future increases, may avoid IHT on your estate.
Simplest isn’t always best
If giving mum and dad the money is impractical, or if you’re providing for a younger relative, an outright gift may not be the most suitable idea. As mentioned above, a gift to older relatives can create tax problems for them, and not every child can safely be trusted to buy and keep the house you’ve paid for. Family circumstances can also mean that you cannot rely on the money you’ve provided coming back down the line to your children. This is where a trust comes in.
Trust a trust
A trust set up to own the property for the benefit of any relative will get the CGT relief. You can be a trustee, and so make sure the property is used in ways you approve of.
You can fund the trust in one of two ways; by an outright gift if you have the cash, or by funding a mortgage to pay for the property. With an outright gift, you need to be aware of the IHT threshold, but if you’ve made no other gifts in the preceding seven years, your gift to the trust should be IHT-free up to £325,000.
If you fund the trust by paying it the regular payments needed to pay the mortgage, those are likely to be exempt from IHT as “normal expenditure out of income”.
The trust can contain flexible ’powers of appointment’ enabling you to redirect the trust funds how you like, when you need to.
Practical Tip:
Get more bang for your bungalow by saving IHT as well - if you provide a home to an elderly relative through a trust, the property doesn’t form part of their estate for IHT purposes. This can be helpful if they’ve got savings that push them near to the IHT threshold. When they no longer need the property, you can use the trust to benefit your children or grandchildren.
